Appendix — First Boston Corp. v. Chris-Craft Industries, Inc.
Supreme Court brief1973
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No. 73-___- JUL 20 1973
ICHAEL RODAK, JR_.CLE
T3832] 52 : — me
In THE :
Supreme Court of the United States
October Term, 1973
Tue Fist Boston Corporation,
Petitioner,
v.
Curis-Crart Inpusrriks, Inc.,
—
23-15
Bancor Punta Corporation, Nicotas M. Saco
anp Davy W. Wa.uace,
Petitioners,
v.
Curis-Crart Inpustries, Inc.,
Re dent.
; m 4 esponden
Howarp Piper, Tuomas F. Piper anp Wiiu1am T. Piper, JR.,
Petitioners,
v.
Curis-Crart Inpvustrisrs, Inc.,
Respondent.
JOINT APPENDICES TO PETITION FOR A
WRIT OF CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE SECOND CIRCUIT
Counsel listed on First Page.
WET eRe Ree
Joun F, Arnine
Cuartes W. SuLiivan
48 Wall Street,
New York, New York 10005.
Counsel for Petitioner
The First Boston Corporation
Suttivan & CROMWELL,
Of Counsel.
James V. Ryan f
C. Kennern Suang, Jr. :
One Rockefeller Plaza, F
New York, New York 10020.
Counsel for Petitioners
Bangor Punta Corporation,
Nicolas M. Salgo and
David W. Wallace
WessterR SHEFFIELD FLEISCHMANN
Hircucock & BrooxkFieE.p,
Of Counsel.
Pavut G. PennoyeEr, JR.
Epwarp C. McLean, Jr.
ZacHaRY SHIMER
25 Broadway,
New York, New York 10004.
Counsel for Petitioners
Howard Piper, Thomas F. Piper
and William T. Piper, Jr.
CHADBOURNE PARKE
Wuitesie & Wo.rr
Of Counsel.
July 20, 1973.
Decrees: 5 Copan kB
INDEX
Opinion of Judge Charles H. Tenney of the
United States District Court of the
Southern District of New York in Chris-
Craft Industries, Inc. v. Piper Aircraft
Corporation et al., dated August 19, 1969
Opinion of the Second Circuit Court of
Appeals. Sitting in banc in Chris-Craft
Industries, Inc. v. Bangor Punta Cor-
poration and David W. Wallace, dated
BON TE, TAR ci ene nemneennceen
Opinion of Judge Milton Pollack of the
United States District Court of the
Southern District of New York in
Securities and Exchange Commission v.
Bangor Punta Corporation, dated
BE Bs BEE ekeknuie cea nninenens
Memorandum Opinion of Judge Milton
Pollack of the United States District
Court of the Southern District of New
York in Securities and Exchange Com-
mission v. Bangor Punta Corporation,
dated September 17, 1971 ___----_____-_
Memorandum of Settlement of Judgment
of Judge Milton Pollack of the United
States District Court of the Southern
District of New York in Securities and
Exchange Commission v. Bangor Punta
Corporation, dated November 17, 1971
Opinion of Judge Milton Pollack of the
United States District Court of the
Southern District of New York in Bangor
Punta Corporation v. Chris-Craft Indus-
tries, Inc. et al., dated December 10, 1971
co OC Aamo 8 i a AR
Appendix A
Appendix B
Appendix C
Appendix D
Appendix EK
Appendix F
ii
Opinion of Judge Milton Pollack of the
United States District Court of the
Southern District of New York in Chris-
Craft Industries, Inc. v. Piper Aircraft
Corporation, et al., dated December 10,
SE io wank Seactscinioe ane e ea aewiamalls
Opinion of the Second Circuit Court of
Appeals in Chris-Craft Industries, Inc.
v. Piper Aircraft Corporation et al.;
Bangor Punta Corporation vy. Chris-
Craft Industries, Inc.; and Securities
and Exchange Commission v. Bangor
Punta Corporation, dated March 16, 1973
Order of Second Cireuit Court of Appeals,
Denying Petition for Rehearing, dated
SEE Ts TEE weicinitnptneeinnnas
Orders of Second Cireuit Court of Appeals,
Denying Petition for Rehearing, in banc,
URGE RTE Wy BOE ein ttieincecncce
Appendix @
Appendix H
Appendix I
Appendix J
APPENDIX A
Opinion of Judge Charles H. Tenney of the
United States District Court of the Southern
District of New York in Chris-Craft Industries,
Inc. v. Piper Aircraft Corporation et al., dated
August 19, 1969
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Judge Tenney’s Opinion
CHRIS-CRAFT INDUSTRIES, INC.,
Plaintiff,
v.
PIPER AIRCRAFT CORPORATION
et al., Defendants.
No. 69 Civ. 2227.
United States District Court
S. D. New York.
Aug. 19, 1969.
Paul, Weiss, Goldberg, Rifkind, Wharton & Garrison,
New York City, Arthur L. Liman, Sidney S. Rosdeitcher,
Joseph J. Ackell, Alan L. Schlosser, New York City, of
counsel, for plaintiff.
Chadbourne, Parke, Whiteside & Wolff, New York City,
Donald L. Deming, Richard B. Leather, Zachary Shimer,
New York City, of counsel, for defendant Piper Aircraft
Corp. and individually named members of Piper family.
Webster, Sheffield, Fleischmann, Hitchcock & Brookfield,
New York City, James V. Ryan, New York City, William
L. D. Barrett, Nancy Pasley, of counsel, for Bangor-Punta
Corp.
OPINION
TENNEY, District Judge.
The instant suit arises out of the protracted and often
bitter contest between plaintiff Chris-Craft Industries, Ine.
(hereinafter referred to as ‘**Chris-Craft’’) and defendant
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Judge Tenney’s Opinion
Bangor Punta Corporation (hereinafter referred to as
‘Bangor Punta’’) to gain control of defendant Piper Air.
eraft Corporation (hereinafter referred to as ‘‘Piper’’),
Alleging various violations by defendants of the Securities
Act of 1933 and the Securities Exchange Act of 1934 and
the Rules promulgated with respect to each such Act, Chris.
Craft seeks an injunction pendente lite restraining Bangor
Punta from: (1) accepting 107,574 shares of Piper common
stock tendered by the public shareholders of Piper to
Bangor Punta pursuant to the terms of Bangor Punta’s
General Exchange Offer of July 18, 1969. Chris-Craft urges
that these shareholders be given the opportunity to rescind
their tenders after a ‘‘full and fair disclosure’’ has been
made of the terms of Bangor Punta’s exchange offer; (2)
acquiring additional shares of Piper; (3) effecting a merger
or consolidation of Bangor Punta and Piper; and (4) voting
120,200 shares of Piper purchased in May 1969 by Bangor
Punta in five large cash transactions, effected neither on
a securities exchange nor from or through a broker or
dealer.
Piper is a publicly-held Pennsylvania corporation whose
capital stock consists of 5,000,000 authorized shares of $1.00
par value common stock, of which approximately 1,641,890
shares are issued and outstanding. The Piper family, three
of whom are members of Piper’s Board of Directors and
defendants herein, own approximately 501,090 of the 1,641,
890 outstanding shares. Piper’s stock has been listed on the
New York Stock Exchange (hereinafter referred to as ‘‘the
Exchange’’) since 1957.
Chris-Craft is a diversified manufacturer whose com-
mon and preferred stock and convertible debentures are
traded on the Exchange. Bangor Punta is a publiely-held
diversified corporation whose stock and bonds are also
listed on the Exchange.
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Judge Tenney’s Opinion
In January 1969 Chris-Craft, in an effort to gain control
of Piper, began acquiring shares of Piper on the open
market. On January 23, 1969, Chris-Craft publicly an-
nounced its interest in Piper and made a public tender offer
for up to 300,000 shares of Piper stock at $65.00 per share
with the ‘‘right to purchase excess shares.’’
Piper’s Board of Directors, by letter dated January 27,
1969, advised Piper stockholders that in their opinion Chris-
Craft’s offer was inadequate and not in the best interests
of Piper shareholders. Unsatisfied with the history of
Chris-Craft’s management, Piper’s management and Board
of Directors decided that the best interests of Piper and
its shareholders required them to resist this attempted
takeover.
On January 30, 1969, the Board of Directors of Piper
and the Grumman Aircraft Engineering Corporation (here-
inafter referred to as ‘‘Grumman’’) approved an agree-
ment whereby Piper would sell 300,000 of its authorized but
unissued shares to Grumman for $65.00 per share, in con-
templation of thereafter exploring the possibility of a
merger with Grumman. This agreement, although never
realized, adversely affected Chris-Craft’s cash tender offer,
which expired on February 3, 1969.
On February 27, 1969, Chris-Craft filed a proposed
registration statement and prospectus with the Securities
and Exchange Commission (hereinafter referred to as ‘‘the
SEC’’) in which it proposed to offer to exchange certain
Chris-Craft securities for up to 300,000 shares of Piper.
Pursuant to its continuing efforts, on March 24, 1969
Piper issued 320,000 shares of its authorized but unissued
common stock in exchange for all the outstanding stock
of the United States Concrete Pipe Company of Florida,
a subsidiary of a publicly-held investment company listed
COP LmOAES
A-4
Judge Tenney’s Opinion
on the Exchange. At the same time, Piper exchanged 149,199
shares of its authorized but unissued common stock for
approximately 9914 percent of the outstanding shares of
Southply, Inc., a closely-held Louisiana corporation. The
Board of Governors of the Exchange, with whom listing
applications covering the issued shares were filed, felt that
the distribution of almost 30 percent of Piper’s authorized
stock violated the Exchange’s listing criteria. Accordingly,
trading in Piper stock was suspended and delisting pro-
ceedings authorized. When Piper’s management agreed to
rescind these transactions, trading in Piper stock was re-
sumed.
While Piper’s prolonged efforts to fend off Chris-Craft
raise serious questions as to the propriety of such conduct,
this action has little relevance to the instant proceedings.
For the issues raised herein relate solely to Bangor Punta’s
exchange offer of July 18, 1969 and its purchases, for cash,
of Piper stock in May 1969.
In early January 1969, defendant First Boston Corpo-
ration (hereinafter referred to as ‘‘First Boston’’), an in-
vestment banking firm which serves as financial adviser to
Piper, inquired whether Bangor Punta was interested in
a possible acquisition of Piper. Although Bangor Punta
responded affirmatively, nothing developed at that time.
At a meeting convened on February 24, 1969, Bangor Punta
explained that it would not consider attempting such an
acquisition unless the Piper family sold their 501,090 shares
to Bangor Punta. This condition was finally accepted by
the Piper family on April 22, 1969.
On May 7, 1969, Chris-Craft publicly announced the
terms of its then pending registration statement which pro-
posed an exchange offer of Chris-Craft stock for 300,000
to 400,000 shares of Piper. The following day, after pro-
A-5
Judge Tenney’s Opinion
tracted discussions with Piper’s representatives, a final
agreement was entered into pursuant to which the Piper
family agreed to exchange their shares for specified Bangor
Punta securities. Additionally, the agreement provided
that Bangor Punta would use its best efforts to acquire more
than 50 percent of the outstanding shares of Piper stock.
As part of those best efforts, Bangor Punta agreed to make
an exchange offer to all other holders of Piper stock ‘‘under
which such holders will be entitled to exchange each share
of Piper common stock held by them for Bangor Punta
securities and/or cash having a value, in the written opinion
of The First Boston Corporation, of $80 or more.’’ The
agreement further provided that if Bangor Punta succeeded
in acquiring more than 50 percent of the outstanding Piper
shares, and if, in the written opinion of First Boston, the
value of the shares offered to the members of the Piper
family was less than $80.00 on the opening day of the
exchange offer, Bangor Punta would deliver to the mem-
bers of the Piper family securities and/or cash with a value
“equal to the difference between $80 and the Exchange
Offer Value.’? No agreement had been reached at that
time as to the components of the proposed package of
Bangor Punta securities to be offered to the public Piper
shareholders.
Later that same day, Bangor Punta and Piper issued
identical press releases announcing that they had reached
an agreement under which Bangor Punta would acquire
the Piper family’s interest in Piper and that:
‘Bangor Punta has agreed to file a registration state-
ment with the SEC covering a proposed exchange offer
for any and all of the remaining outstanding shares of
Piper Aircraft for a package of Bangor Punta securi-
ties to be valued in the judgment of the First Boston
Corporation at not less than $80 per Piper share.’’
A-6
Judge Tenney’s Opinion
At that time, Piper stock was selling on the Exchange at
approximately sixty dollars.’
On May 26, 1969, the SEC instituted an action against
Bangor Punta and Piper in the United States District Court
for the District of Columbia. Therein, the SEC charged
that the May 8th press release was ‘‘gun-jumping”’ in viola-
tion of Section 5(c) of the Securities Act of 1933, as
amended, 15 U.S.C. § 77e(e),? and SEC rule 135. Without
admitting any of the allegations of the complaint, Bangor
Punta and Piper consented to the entry of a final judgment
of permanent injunction which enjoined them, infer alia,
from offering to sell or from selling either of their securities
until a registration statement was filed with the SEC as
to such securities.
Bangor Punta filed its registration statement with the
SEC covering its exchange offer on May 29, 1969. Included
in the filing, as an exhibit to the registration statement,
was a copy of the agreement of May 8, 1969. Preliminary
prospectuses in the form contained in the registration
statement were sent by Bangor Punta to all Piper share-
holders of record on the same day the registration state-
ment was filed. It became effective on July 18, 1969 and ex-
pired on July 29, 1969.
Bangor Punta now owns 728,864 shares of Piper, or
44.4 percent of its outstanding stock. As a result of its
! Affidavit of John E. Flick, dated August 4, 1969, at 10.
2Section 5(c) of the Securities Act of 1933, as amended, 15
U.S.C. § 77e(c), provides:
“It shall be unlawful for any person, directly or indirectly
* * * to offer to sell or offer to buy through the use or medium
of any prospectus or otherwise any security, unless a registration
statement has been filed as to such security * * *.”
A-7
Judge Tenney’s Opinion
most recent exchange offer, which terminated on August 4.
1969, Chris-Craft has now acquired a total of at least
654,000 shares of Piper, or approximately 39.8 percent of
its outstanding shares. With approximately 259,026 shares
of Piper still in the hands of the public, it would appear that
at this time neither Chris-Craft nor Bangor Punta has
succeeded in gaining control of Piper.
{1] Chris-Craft argues that the May 8th identical
press releases of Bangor Punta and Piper constituted
flagrant violations of Section 5(¢) of the Securities Act of
1933, as amended, 15 U.S.C. § 77e(c) and SEC Rule 135, 17
C.F.R. § 230.135, in that no registration statement had been
filed with the SEC prior thereto.
Until the actual execution of the May 8th agreement,
only top management personnel and their confidential ad-
visors had been advised of the negotiations with Piper.
Upon execution, however, it became necessary to involve a
great many other persons in the arrangements, such as an
indenture trustee, independent auditors, printers, outside
counsel and stenographers. Maintenance of security
against premature disclosure of the terms of agreement
heeame virtually impossible? Since the $80.00 figure set
by the terms of the agreement was substantially above the
market price for a share of Piper stock, the opportunity
for stock manipulations and unfair dealings in Piper stock
by those who may have learned of the agreement prior to
its becoming public knowledge was apparent. The May 8th
press release would therefore appear both desirable and
consonant with the directives of Securities & Exch. Comm’n
v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968),
cert. denied, Coates v. Securities & Exch. Comm’n, 394
US. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969). Further,
ee
3 Supra note 1 at 9.
A-8
Judge Tenney’s Opinion
the guidelines for press releases issued by the Exchange
on July 19, 1968 support this policy of timely disclosure,
‘‘Negotiations leading to acquisitions and mergers,
stock splits, the making of arrangements preparatory
to an exchange, or tender offer, * * * are the type of
developments where the risk of untimely and inadvert-
ent disclosure of corporate plans is most likely to occur,
Frequently, these matters require discussion and study
by corporate officials before final decisions can be made,
Accordingly, extreme care must be used in order to
keep the information on a confidential basis.
‘‘Where it is possible to confine formal or informal
discussions to a small group of the top management of
the company or companies involved and their individ
ual confidential advisors where adequate security can
be maintained, premature public announcement may
properly be avoided. * * *
‘*At some point it usually becomes necessary to
involve other persons to conduct preliminary studies
or assist in other preparations for contemplated trans-
actions, e. g., business appraisals, tentative financing
arrangements, attitude of large outside holders, avail-
ability of major blocks of stock, engineering studies,
market analyses and surveys, ete. Experience has
shown that maintaining security at this point is virtu-
ally impossible. Accordingly, fairness requires that
the Company make an immediate public announcement
as soon as confidential disclosures relating to such in-
portant matters are made to ‘outsiders.’
‘‘The extent of the disclosures will depend upon the
stage of discussion, studies, or negotiations. So far as
possible, public statements should be definite as to price,
ratio, timing and/or any other pertinent information
A-9
Judge Tenney’s Opinion
necessary to permit a reasonable evaluation of the mat-
ter. As a minimum, they should include those dis-
closures made to ‘outsiders’.’? (Emphasis added.)
New York Stock Exchange Company Manual at A-19
(July 19, 1968).
Section 5(c) of the Securities Act of 1933 makes it unlaw-
ful for any person directly or indirectly, to offer to sell or
offer to buy any security unless a registration statement has
been filed as to such security. The May 8th press release,
however, merely asserts that Bangor Punta has agreed to
file a registration statement with the SEC covering a pro-
posed exchange offer for any and all of the remaining out-
standing shares of Piper for a package of Bangor Punta
securities. On its face, this press release cannot itself be
construed as an offer to sell or buy securities. This view
is supported by SEC Rule 135, which, in pertinent part,
provides:
‘“*(a) For the purposes only of Section 5 of the Act,
the following notices sent by an issuer in accordance
with the terms and conditions of this rule shall not be
deemed to offer any security for sale:
‘“*(2) A notice to any class of security holders of
such issuer or of another issuer advising them that it
proposes to offer its securities to them in exchange for
other securities presently held by such security holders
* * *.” (Emphasis added.)
Chris-Craft argues further than in addition to Section
d(c) and Rule 135, Rules 10b-5, 17 C.F.R. § 240.10b-5, and
10b-6, 17 C.F.R. § 240.10b-6, forbid a person making an ex-
change offer from placing a value on the securities being
A-10
Judge Tenney’s Opinion
offered, since any opinion as to value might be self-serving
and misleading.
SEC Rule 135 provides that ‘‘(a) notice to any class of
security holders * * * advising them that it proposes to
offer its securities to them in exchange for other securities
presently held by such security holders * * * — shall con.
tain * * * the name of the issuer and the title of the
securities to be surrendered in exchange for the securities to
be offered, [and] the basis upon which the exchange is pro-
posed tobe made * * *.”’
Since, as previously noted, the precise components which
were to comprise the package of Bangor Punta securities
to be offered for each share of Piper had not been deter-
mined at the time of the May 8th press release, Bangor
Punta and Piper could do no more than set forth the basis
upon which the exchange offer was proposed in the same
terms as contained in the May 8th agreement. Additionally,
since the Exchange’s guidelines for press releases pre-
scribed that ‘‘[s]o far as possible, public statements should
be definite as to price, ratio, timing and/or any other
pertinent information necessary to permit a reasonable
evaluation of the matter’’, the reference to the $80.00 figure
cannot be deemed unjustified.
Nor ean it be said, as Chris-Craft urges, that Piper and
Bangor Punta have, by means of the May 8th press release
and the latter’s preliminary and final prospectuses, deliber-
ately misled the public into believing that Bangor Punta
would, in exchange for each share of Piper, tender securities
immediately salable for $80.00, in violation of Sections 9,
10(b) and 14(e) of the Securities Exchange Act of 193+ as
amended 15 U.S.C. § 78i, 15 U.S.C. § 78j(b), 15 U.S.C. §78n
(e), respectively, and of the rules promulgated with respect
to each such Act.
A-11
Judge Tenney’s Opinion
On July 18, 1969, First Boston rendered a formal opinion
to Bangor Punta and Piper that based on the market and
other conditions existing prior to the opening of business
on July 18, 1969, the combination of securities provided for
in the general exchange offer outlined in the registration
statement had a value of not less than $80.00.
Such a determination, of course, is normally not a me-
chanical task but is essentially a matter of judgment. This
evaluation was arrived at by a committee of eleven experi-
enced and knowledgeable personnel. In reaching its col-
lective judgment, the committee met on two different occa-
sions to consider all the facts they deemed relevant.
Additionally, over six weeks were spent in preparing the
material upon which the committee relied.4 No persuasive
argument has been presented to the effect that the value
placed on the package of Bangor Punta securities by First
Boston was not reached in good faith. Surely, there is no
basis for implying from the May 8th press release that such
value would endure for the duration of the exchange offer,
or be immediately realizable on any particular day. The
vagaries of the marketplace belie such a construction. The
value placed on the package may vary from buyer to buyer
and from day to day. With this in mind, Bangor Punta
specified at two places in its final prospectus, at the in-
sistence of the SEC, that:
‘‘No guarantee of, or representation as to, the
value of the securities offered by Bangor Punta pur-
suant to the Exchange Offer is or can be made.’’
‘Clear misleading statements need be shown * * * be-
fore this court ean enjoin a tender offer. * * * In the in-
stant case the plaintiffs have failed to show clear mislead-
* Affidavit of John S. Buckley, dated August 4, 1969, at 2.
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Judge Tenney’s Opinion
ing representations in the tender offer or the absence of
statements in the tender offer which in combination with
other representations would lead to a conclusion that fraud
was being perpetrated upon unsuspecting shareholders.”
Jacobsen Mfg. Co. v. Sterling Precision Corp., 282 F.Supp.
598, 603 (E.D.Wis.1968); Fleischer and Mundheim, Cor.
porate Acquisition by Tender Offer, 115 Penn.L.Rev. 317,
338 (1967).
[2] Chris-Craft’s contention that the letters of June
4 and June 20, 1969, sent to all Piper shareholders by W. T.
Piper, Jr., Chairman of the Board of Directors and Presi-
dent of Piper, urging acceptance of the Bangor Punta ex-
change offer, violated Section 14(e) of the Securities Ex-
change Act of 1934, as amended, 15 U.S.C. § 7Sn(e), in
failing to disclose that the Piper family might obtain addi-
tional securities if Bangor Punta was successful in gaining
control of Piper, is unsound. This adjustment, provided
for in the agreement of May 8th, was designed to compen-
sate the Piper family for having fixed its exchange package
more than two months prior to the effective date of the ex-
change offer and at a lower value than the initial package
offered to the public. Simply put, it merely provided pro-
tection for the Piper family should the market value of the
securities they were to receive be less than the value of the
securities offered to other Piper shareholders. Realisti-
eally, I cannot say that there is a substantial likelihood that
but for this omission in the letters of June 4 and June 20,
1969, a Piper shareholder would have accepted the Chris-
Craft exchange offer rather than the Bangor Punta ex-
change offer. See General Time Corp. v. Talley Indas,
Inc., 403 F.2d 159, 162 (2d Cir. 1968), cert. denied, 393 US.
1026, 89 S.Ct. 631, 21 L.Ed.2d 570 (1969).
A copy of the agreement of May 8th, which contained
this provision, was filed with the SEC on May 29, 1969, as
(7122 App. A)
A-13
Judge Tenney’s Opinion
an exhibit to the registration statement. Further, James
J. Rochlis and C. Leonard Gordon, officers and directors of
Chris-Craft, explained this provision in detail in a letter
sent to all Piper shareholders prior to the issuance of
Bangor Punta’s final prospectus. At the suggestion of the
SEC, reference to the possibility that the Piper family’s
package might be increased in the event Bangor Punta ob-
tained control of Piper was printed on the cover page of
Bangor Punta’s final prospectus.. ‘Surely stockholders,
once informed of the facts, have a right to make their own
decisions in matters pertaining to their economic self-
interest, Whether consonant with or contrary to the advice
of others, whether such advice is tendered by management
or outsiders or those motivated by self-interest.’’? Ameri-
ean Crystal Sugar Co. v. Cuban-American Sugar Co., 276
F.Supp. 45, 50 (S.D.N.Y.1967).
[3] Rule 10b-6, 17 C.F.R. § 240.10b-6, provides that it
shall constitute a ‘‘manipulative or deceptive device or con-
trivance’’ under Section 10(b) of the Securities Exchange
Act of 1954, 15 U.S.C. § 78j(b), for an underwriter to pur-
chase securities while he is still participating in their distri-
bution.” R.A. Holman & Co. v. Securities & Exch. Comm’n,
566 F.2d 446 (2d Cir. 1966), opinion amended on rehearing,
377 F.2d 665 (2d Cir.), cert. denied, 389 U.S. 991, 88 S.Ct.
73, 19 L.Ed.2d 482 (1967), rehearing denied, 389 U.S. 1060,
88 S.Ct. 767, 19 L.Ed.2d 867 (1968). Manipulation was one
of the basie evils with which Congress was concerned in
enacting statutes to regulate the securities market. See
* Affidavit of John J. Martin, dated August 4, 1969, at 4-5.
®“Distribution” comprises “the entire process by which in the
course of a public offering the block of securities is dispersed and
ultimately comes to rest in the hands of the investing public.” Lewisohn
Copper Corp., 38 S.E.C. 226, 234 (1958).
A-14
Judge Tenney’s Opinion
Section 2(3) of the Securities Exchange Act of 1934, 15
U.S.C. §78b(3). Manipulation was often accomplished by
those about to sell securities or already engaged in selling
them, bidding on the market for the same securities, thereby
creating an unjustifiable impression of market activity
which would facilitate the sale at artificially high prices,
As was noted in Securities & Exch. Comm’n v. Scott Taylor
& Co., 183 F.Supp. 904, 907 (S.D.N.Y.1959): **'This was
one of the practices which the Securities Exchange Act
was designed to eradicate, and it is the practice which is
covered by Rule X-10B-6."’ (Footnotes omitted.) (Em-
phasis added.) Weitzen v. Kearns, 271 F.Supp. 616, 623
(S.D.N.Y.1967) ; Securities & Exch. Comm'n vy. Electronies
Security Corp. 217 F.Supp. 831, 836 (D.Minn.1963),
Bangor Punta’s cash purchases of 120,200 shares of Piper
in five transactions in May 1969, effected neither on the
Exchange nor from or through a broker or dealer, were
obviously not designed to place market pressures on the
distribution price of Piper, so as to create an artificially
high price for this security. Any increase in the price of
Piper shares as a result of these transactions would obvi-
ously serve only to make Bangor Punta’s exchange offer
appear less desirable to Piper shareholders.
The SEC has recently proposed Rule 10b-13, whieh
would prohibit a person making a cash tender or exchange
offer for any equity security from purchasing such secuti-
ties otherwise than pursuant to the cash tender or exchange
offer. Although the release states that this new Rule is,
in effect, a codification of existing interpretations under
Rule 10b-6,7 this Court has been unable to find, and has not
heen referred to, any support therefor. Moreover, the re-
cent decision in Armour & Co. v. General Host Corp., 2%
7 Release No. 34—8595, May 5, 1969, CCH § 77,706.
A-15
Judge Tenney’s Opinion
F.Supp. 470, 476 (S.D.N.Y.1969), would appear to the con-
trary.
‘*(Sjubstantial legal issues exist whether Rule
10-b(6) is applicable at all to the instant transactions.
The principal question is whether subsection (b) of the
Rule applies to the stock of the ‘target’ corporation
[Piper], as well as that of the distributor.”’
Finally, in considering Chris-Craft’s contentions that
Bangor Punta and Piper have violated the terms of the
final judgment of permanent injunction in making various
statements which have been attributed to them by the press,
itis well to remember that such episodes may reflect ‘‘the
difficulties commonly experienced in answering skilled and
energetic reporters who seek more definiteness than there
is, and the frailties inevitable in human communica-
tion* * *.** Electronie Specialty Co. v. International Con-
trols Corp. 409 F.2d 937, 951 (2d Cir. 1969). This, of
course, would appear especially true when both Piper and
Bangor Punta have expressly denied ever making such
statements.’
It has been frequently noted that a preliminary injune-
tion is an extraordinary equitable remedy which will be
granted only upon a showing by the applicant therefor that
it will probably sueceed on the trial and that it will suffer
irreparable injury if the defendant is not restrained from
certain activity pending trial. American Metropolitan
Enterprises of N. Y., Ine. v. Warner Bros. Records, 389
F.2d 903 (2d Cir. 1968), and the eases cited therein; Clairol
Ine. v. Gillette Co., 389 F.2d 264 (2d Cir. 1968) (prelim-
inary injunction will not be granted except upon a clear
showing of probable success).
* Affidavit of Donald L. Deming, dated August 4, 1969, at 16;
supra note 1 at 14-15,
A-16
Judge Tenney’s Opinion
[4] As previously noted, both the Chris-Craft and
Bangor Punta exchange offers have expired. Neither
party has gained control of Piper, and both are still in a
position to do so. Although a finding by the trial coun
that plaintiff will ultimately prevail on the merits is not
required before issuing a preliminary injunction when, as
here, there would appear to be a lack of an adequate show-
ing of irreparable damage, the party seeking a preliminary
injunction has the burden of convincing the trial court with
reasonable certainty that it will succeed upon the trial.
Unicon Management Corp. v. Koppers Co., Inc., 366 F.2d
199, 204-05 (2d Cir. 1966). To show irreparable injury,
Chris-Craft must at least demonstrate that ‘‘unless an
injunction is granted, the plaintiff will suffer harm whieh
cannot be repaired.’’ Studebaker Corp. v. Gittlin, 360
F.2d 692, 698 (2d Cir. 1966). No such showing has been
made herein; nor does it appear that the ‘‘ balance of hard-
ships’’ tip decidedly toward plaintiff.
[5] ‘*The historic injunctive process was designed to
deter, not to punish.’’ Hecht Co. v. Bowles, 321 U.S. 321,
329-30, 64 S.Ct. 587, 592, 88 L.Ed. 754 (1944); Hambros
Bank, Ltd. v. Meserole, 287 F.Supp. 69, 72 (S.D.N.Y.1968).
The conduct of Bangor Punta must be tested, as the Court
of Appeals for the Second Circuit noted in both Electronic
Specialty Co. v. International Controls Corp., supra at 98
of 409 F.2d, and Symington Wayne Corp. v. Dresser Indus-
tries, Inc., 383 F.2d 840, 843 (2d Cir. 1967), by whether
‘* ‘any of the stockholders who tendered their shares would
probably not have tendered their shares if the alleged vio-
lations had not occurred.’ ’’ After careful consideration, |
cannot say that in the instant suit such would have been
the case. The equities of the situation would, therefore,
appear to speak against the issuance of a preliminary it-
junction. Armour & Co. v. General Host Corp., supra at
475 of 296 F.Supp.
A-17
Judge Tenney’s Opinion
It is not unlikely that further exchange offers to the
remaining public shareholders of Piper may now be con-
templated both by Bangor Punta and Chris-Craft. In this
respect, the, it is wise to recall, as was noted in Sherman
y. Posner, 266 F.Supp. 871, 874 (S.D.N.Y. 1966), that:
‘‘(Nlo matter how clearly it was indicated other-
wise, the issuance of the injunction undoubtedly would
be viewed by some [of these Piper shareholders] as a
favorable adjudication of the claims of the plaintiff.
This would be tantamount to a determination of
wrongdeing on the part of the*** [Bangor Punta]
management. Just how this result could be remedied
in the event it was found at a full hearing that the
claims of the plaintiff were unfounded is not readily
perceptible to this court.’’
See Kauder v. United Board & Carton Corp., 199 F.Supp.
420, 424 (S.D.N.Y. 1961); Mack v. Mishkin, 172 F.Supp.
885, 889 (S.D.N.Y. 1959).
Accordingly, and for the foregoing reasons, plaintiff’s
motion is in all respects denied.
So ordered.
mA —
Pobre aye
APPENDIX B
Opinion of the Second Circuit Court of Appeals.
Sitting in banc in Chris-Craft Industries, Inc. v.
Bangor Punta Corporation and David W. Wallace,
dated April 28, 1970
B-1
UNITED STATES COURT OF APPEALS
For THE Seconp Circuit
No. 249—September Term, 1969.
(Submitted to the court in banc
February 2, 1970* Decided April 28, 1970.)
Docket No. 33983
Curis-Crart Ixpustries, Inc.,
Plaintiff-Appellant,
Vv.
Baxcor Punta Corporation and Davin W. Wa.tace,
Defendants-A ppellees.
Before:
LumBarp, Chief Judge,
WaterMAN, Moore, Frienpiy,** Smitu, KavrMan,
Hays, ANvERson and FeErnserc, Circuit Judges.
* Argued on September 19, 1969 before a division of the court
composed of Chief Judge Lumbard and Judges Waterman and
Kauiman. After the filing of panel opinions on November 6, 1909 a
petition for rehearing with suggestion that the full court also rehear
the case was timely filed. The division denied the rehearing petition
as of January 12, 1970, but a rehearing in banc was then granted, the
in banc reconsideration to be had without further oral argument.
The parties were granted permission to file further briefs on or
before February 2, 1970.
ae eer ; ‘
After the nine active judges decided to rehear the case in banc
Judge Friendly refrained from any further participation in the dis-
position of the case.
April 28, 1970, Second Circuit Opinion
Appeal from an order denying a motion for an injure.
tion pendente lite, United States District Court for the
Southern District of New York, Tenney, J. Order aftirmed.
However, as the rationale of affirming opinion differs
materially from rationale of opinion below the case is re-
manded for further proceedings.
Artuur L. Limay, Joseru J. AcKELL, Atay J,
Scutosser, Pavi, Weiss, GoLpBerc, Riki),
Wuarton & Garrtsox, New York City, fu
Plaintiff-Appellant.
James V. Ryax, Wittiam L. D. Barrerr, Naser
L. Pastey, Wepster, SHEFFIELD, FLeIscu-
MANN, Hircucock & BrookrieLp, New York
City, for Defendants-Appellees.
Pau G. Pexnoyer, Jr., Zacuary Surmer, Inet
Conrad WaArSHAUER, CHADBOURNE, Parke.
Wuitesie & Woxtrr, New York City, for
Piper Aircraft et al.
Puiuie A. Loomis, Jr., General Counsel: David
Ferber, Solicitor; Meyer Eisenberg, Asso-
ciate General Counsel; Harvey A. Rowen.
Attorney, Securities & Exchange Commis
sion, for Amicus Curiae.
Waterman, Circuit Judge:
Plaintiff-appellant, Chris-Craft Industries, Inc., appeals
from the denial of an order entered below in the United
States Distriet Court for the Southern Distriet of New York
denying appellant’s motion for a preliminary injunction te
B-3
April 28, 1970, Second Circuit Opinion
restrain Bangor Punta Corporation from gaining and ex-
ercising control of Piper Aircraft Corporation pending a
trial on the merits of whether certain shares of Piper were
acquired by Bangor Punta in violation of governing Rules
of the Securities and Exchange Commission. We affirm the
denial of the preliminary injunction but remand the ease
to the district court for further proceedings there not in-
consistent with the within opinion.
This litigation comes at the end of a hard fought battle
between Chris-Craft Industries and Bangor Punta Corpo-
ration for control of Piper Aireraft Corporation. The eon-
test opened in January 1969 when Chris-Craft began to
acquire Piper shares on the open market. At that time
Piper had 5,000,000 authorized shares of $1.00 par common
stock of which 1,641,890 shares were issued and outstand-
ing. In January 1969 Chris-Craft made a publie exchange
offer for 800,000 Piper shares, and by February these
efforts had gained Chris-Craft 34 per cent of the then
outstanding Piper stock. On February 27, 1969, Chris-Craft
filed with the Securities and Exchange Commission a reg-
istration statement and proposed prospectus for an ex-
change offer for an additional 300,000 shares. Still another
exchange offer was announced by Chris-Craft on May 7
and became effective July 24.
Chris-Craft’s bid for control met strong resistance from
the Piper family and Piper management, who owned 501,090
shares (31 per cent of the outstanding shares), and con-
sidered Chris-Craft to be a corporate raider. The manage-
ment advised other Piper shareholders that Chris-Craft’s
tender offer was inadequate but offered 300,000 of Piper’s
authorized but unissued shares to Grumman Aircraft Cor-
poration at the same price that Chris-Craft had offered.
Althongh this transaction was never consummated, Piper
initially advertised that Grumman had agreed to purchase
B-4
April 28, 1970, Second Circuit Opinion
the Piper shares and the court below noted that Chris.
Craft’s tender offer was adversely affected by this publicity,
Subsequently, on March 22, the Piper management issued
469,199 shares of authorized but unissued stock to acquire
control of two subsidiary corporations, United States Con-
crete Pipe Company of Florida and Southply, Inc. Piper
failed to seek the approval of the New York Stock Hxchange
and of its own shareholders as its listing agreeement with
the Exchange provided it should before issuing a signif-
eant new block of stock. Therefore, the Exchange refused
to approve Piper’s listing application. When the Exchange
shortly afterward suspended trading in Piper shares and
authorized proceedings before the SEC to delist Piper,
Piper rescinded both transactions and trading in its shares
was resumed.
At this juncture, in April 1969, the Piper family resumed
talks which had begun as early as January with Bangor
Punta Corporation. These negotiations bore fruit on May
8, when the two groups agreed that the family would
exchange its 501,090 shares for specified Bangor Punta
securities. Bangor Punta agreed in addition to use its
best efforts to acquire enough additional Piper shares to
make it the holder of more than 50% of the shares out-
standing. As part of these best efforts, Bangor Punta
agreed to make an exchange offer to all Piper shareholders
‘*under which such holders will be entitled to exchange each
share of Piper common stock held by them for Bangor
Punta securities and/or cash having a value, in the written
opinion of The First Boston Corporation, of $80 or more.”
If Bangor Punta succeeded in acquiring 50% or more of
the stock, the consideration paid by Bangor Punta would
be increased to make up to the Piper family the difference.
if any difference there were, between the value of the pack-
age specified in the agreement and $80 per share.
B-d
April 28, 1970, Second Circuit Opinion
The two occurrences which form the basis of Chris-
Craft’s complaint followed the negotiation of this contract.
The first of these occurrences was the issuanee by Bangor
Punta and the Piper management of press releases an-
nouncing the transaction on May 8, the day the contract
was signed and the day after Chris-Craft announced the
terns of its second exchange offer. After stating that the
Piper family would receive Bangor Punta securities for
their shares, the Bangor Punta press release continued as
follows:
Bangor Punta has agreed to file a registration state-
ment with the SEC covering a proposed exchange offer
for any and all of the remaining outstanding shares
of Piper Aireraft for a package of Bangor Punta se-
curities to be valued in the judgment of The First
Boston Corporation at not less than $80 per Piper
share. The registration statement covering all secur-
ities to be issued will be filed as soon as possible
and a meeting of the shareholders of Bangor Punta
Corporation will be called for approval.
Mr. Piper said that in view of Bangor Punta’s long-
standing policy of maintaining autonomy in the man-
agement of its operating companies, and the similarity
of operating philosophies between the two companies,
he and the Piper family would strongly support the
merger and would recommend it to all shareholders.
Mr. Wallace said Bangor Punta weleomed the as-
sociation with Piper Aircraft, its world-wide distribu-
tion, and its prestigious product name. He said the
consolidation would align the Piper Aircraft name
with other leading Bangor Punta companies, including
Smith & Wesson, Starcraft Company, and Waukesha
Motor Company.
5-6
April 28, 1970, Second Circuit Opinion
Bangor Punta manufactures a wide variety of reere-
ational vehicles including sailboats, houseboats, snow.
mobiles, campers, trailers and motor homes. A merger
of Bangor Punta and Piper <Aireraft would bring
Bangor Punta into the light aireraft manufacturing
business.
Sales of the combined companies would reac)
$450,000,000 in fiscal 1969, with approximately $1s0,
000,000, or 40%, in the aireraft, recreational and leisure
time fields.
Piper Aireraft Corporation simultaneously issued a sin-
ilar press release.
These announcements attracted an immediate response
from the Securities and Exchange Commission, which felt
that the release constituted an offer to sell securities be-
fore any registration statement had been filed. Accord.
ingly the SEC instituted an action against Bangor Punta
and Piper in the United States Distriet Court for the
District of Columbia on May 26, and on the same day the
defendants consented to the entry of judgment and the
issuance of an injunction prohibiting further releases of
a similar nature before Bangor Punta’s registration state.
ment and prospectus were filed.
The second oceurrence or set of occurrences of which
Chris-Craft complains took place between May 14 and May
23, when Bangor Punta purchased 120,200 shares of Piper
stock for cash in private transactions. Chris-Craft allege:
that on April 7, 1969, the staff of the SEC warned Chri-
Craft’s top executives that continued cash purchases 0!
Piper stock while Chris-Craft’s own exchange offer wa:
outstanding, as the first one then was, would be regarded
by the SEC as a violation of Rule 10b-6, which prohibits
B-7
April 28, 1970, Second Circuit Opinion
an issuer from purchasing securities while still participat-
ing in their distribution, Chris-Craft did refrain from
further purchases during the remainder of its first tender
offer and all of its second. Bangor Pumia‘s purchases of
stock between May 14 and May 28 occurred while its ex-
change otfer was outstanding if one assumes that the May 8
press release constituted an offer to sell, as the SEC
charged that it did. Bangor Punta states that although
the SEC knew of its cash purchases at the time the con-
sent decree was discussed, May 23 to May 26, the SEC
nonetheless failed to challenge these purchases or ask for
their rescission. However, it is undisputed that the SEC
announced publicly its position on such purchases in a
press release issued May 5.
Bangor Punta’s exchange offer closed on July 29, and
Chris-Cratt’s second offer ended August 4. At that time
Bangor Punta held 45° of Piper's stoek, and Chris-Cratt
held 40°. By the time this case came to argument on ap-
peal, Chris-Craft had increased its holdings to 46.2°0 of
Piper’s common stock, phe Bangor Punta had finally ae-
quired a majority with 52
Chris-Craft commenced the present lawsuit on July 22,
1969, seeking a preliminary injunction which would order
Bangor Punta (1) to offer the right to rescind to all per-
sons Who had tendered Piper shares to Bangor Punta per-
suant to its exchange offer, (2) to refrain from acquiring
further Piper shares, (3) to refrain from effecting 2
merger of Piper and Bangor Punta, and (4) to refrain
from voting the 120,200 Piper shares acquired for cash be-
tween May 16 and May 23, 1969. The district court denied
Chris-Craft’s motion for a preliminary injunction, citing
both the lack of any irreparable injury to Chris-Craft if
the motion were denied and the lack of any illegal behavior
B-8
April 28, 1970, Second Circuit Opinion
on the part of Bangor Punta. Chris-Craft then sought and
received an expecited appeal to this court.
The Preliminary Injunction
We agree with the district court that a preliminary in-
junction is not warranted. A preliminary injunction should
issue only when it is needed ‘tas an equitable policing
measure to prevent the parties from harming one another
during the litigation,’’ Hamilton Watch Co. v. Benrus
Watch Co., 206 F.2d 738, 742 (2 Cir. 1953). It is apparent
that here there is no threat that unless an injunction issue
before trial ‘‘the plaintiff will suffer harm that cannot be
repaired.’ Studebaker Corp. v Gittlin, 360 F.2d 692, 69s
(2 Cir. 1966). Counsel for Bangor Punta has orally stip-
ulated at argument that no merger between that company
and Piper will be effected before the end of this litigation,
so that no injunction restraining a merger is needed. We
do not see, and Chris-Craft does not suggest, what other
irreparable harm might result from Bangor Punta’s voting
the 120,200 shares acquired for cash in May.
Absent any such prejudice from the voting of the stock
we do not see how harm to plaintiff can result from refus
ing to order before the merits of the case are adjudicated
after a trial a divestiture or rescission of stock acquired
by Bangor Punta during its exchange offer. Indeed, te
‘‘give to a plaintiff all the actual advantage which could be
obtained by the Plaintiff as a result of a final adjudication
of the controversy in favor of the plaintiff’’ would be clearly
inequitable under such circumstances. Selchow & Richte’
Co. v. Western Printing & Lith. Co., 112 F.2d 430, 431 (1
Cir. 1940). We also understand counsel for Chris-Craft to
admit on oral argument that because of its complexity at
order for rescission or divestiture should be worked out
only at trial.
B-9
April 28, 1970, Second Circuit Opinion
Finally, we conclude that the district court did not err
in refusing to enjoin the continued solicitation of stock by
Bangor Punta. At that time Chris-Craft was free to com-
pete equally with Bangor Punta for the remaining Piper
shares, and it did so. We do not understand Chris-Craft
to allege that prior misdeeds of Bangor Punta so deter-
mined the course of the competition for shares after the
date of the decision below that Chris-Craft was placed at
any real disadvantage. Consequently, we affirm the denial
of the preliminary injunction.
However, we also feel compelled to pass on the district
court's alternative holding that Bangor Punta did not vio-
late the securities laws, for it is clear that this ruling below
would determine the outcome of the trial on the merits. On
this issue we disagree with the district court.
The May 8 Press Releases
Section 5(¢) of the Securities Exchange Act of 1933,
as amended, states in part that:
(c) It shall be unlawful for any person, directly or
indirectly, to make use of any means or instruments
of transportation or communication in interstate com-
merce or of the mails to offer to sell or offer to buy
through the use or medium of any prospectus or other-
wise any security, unless a registration statement has
been filed as to such security ....
Section 5(b) of the Act provides that offers to sell may be
made after the registration statement is filed, but before
it becomes effective, provided the offers are made by speci-
fied means which include the use of a prospectus meeting
the requirements of Section 10.
The Securities and Exchange Commission has promul-
gated Rule 135 to exempt certain disclosures of forthcoming
Brnseceniccn- BIGEORY
B-10
April 28, 1970, Second Circuit Opinion
issuances from the definition of an ‘‘offer to sell’’ prohibited
by Section 5(c). This Rule reads in relevant part as
follows:
(a) For the purposes only of section 5 of the Act.
the following notices sent by an issuer in accordance
with the terms and conditions of this rule shall not be
deemed to offer any security for sale:
(2) A notice to any class of security holders of such
issuer or of another issuer advising them that it pro-
poses to offer its securities to them in exchange for
other securities presently held by such security holders;
(b) Such notice shall be sent not more than 60 days
prior to the proposed record date for determining the
security holders entitled to subscribe to the securities
or, if there is no such record date, not more than 60
days prior to the proposed date of the initial offering
of the securities.
(c) The notice shall state that the offering will be
made only by means of a prospectus which will be fur-
nished to such security holders or employees, as the
case may be, and shall contain no more than the fol-
lowing additional information:
(1) The name of the issuer;
(2) The title of the securities proposed to be
offered ;
(4) In the case of an exchange offering, the name
of the issuer and the title of the securities to be sur-
B-11
April 28, 1970, Second Circuit Opinion
rendered in exchange for the securities to be offered,
the basis upon which the exchange is proposed to be
made and the period during which the exchange may
be made, or any of the foregoing;
(6) Any statement or legend required by State law
or administrative authority.
Chris-Craft argues, and the argument is supported by the
SEC, both in its action filed May 26 against Bangor Punta
and in its amicus curiae brief in this court, that the cate-
gories of information privileged under the Rule are ex-
clusive. In view of this exclusivity they contend that as
the rule does not mention disclosure of the value of the
securities to be offered, Bangor Punta’s and Piper’s an-
nouncements that the package of securities offered by Ban-
gor Punta would be valued at $80 oversteps the exemption
and makes the press release an offer to sell.
We agree with this contention. When it is announced
that securities will be sold at some date in the future and,
in addition, an attractive description of these securities and
of the issuer is furnished, it seems clear that such an an-
nouncement provides much the same kind of information
as that contained in a pospectus. See SEC v. Arvida Corp.,
169 F. Supp. 211 (SDNY 1958). Doubtless the line drawn
between an announcement containing sufficient information
to constitute an offer and one which does not must be to
some extent arbitrary. A checklist of features that may be
included in an announcement which does not also constitute
an offer to sell serves to guide the financial community and
the courts far better than any judicially formulated ‘‘rule
of reason’? as to what is or is not an offer. Rule 135 pro-
vides just such a checklist, and if the Rule is not construed
oe eee |
B-12
April 28, 1970, Second Circuit Opinion
as setting forth an exclusive list, then much of its value as
a guide is lost.
Moreover, it is reasonable to conclude that the assigning
of a value to offered shares constitutes an offer to sell,
One of the evils of a premature offer is its tendency to
encourage the formation by the offeree of an opinion of the
value of the securities before a registration statement and
prospectus are filed. There is then no information on file
at the SEC by which the Commission can check the accuracy
of the information which forms the basis of the offeror’s
estimate of value, and any offeree, such as the reader of a
press release, is encouraged to form a premature opinion
of value without benefit of the full set of facts contained in
a prospectus.
Here a statement of the value of the securities Bangor
Punta offered was made directly in the announcement. It
is true that the value which the reader of the May 8 press
releases could be expected to accept is a value based upon
the opinion of a reputable financial corporation and not
upon general and necessarily speculative facts about the
nature of the offeror’s business, as in Arvida, supra. How-
ever, the true significance of the $80 value which Bangor
Punta claimed for its securities package was nonetheless
unclear. Chris-Craft charges that the figure constituted an
outright misrepresentation inasmuch as most readers would
construe the figure as representing the market value of the
package. In fact, Chris-Craft charges, some of the securi-
ties in the package had not previously been sold on the
market at all, and the market value of Piper shares never
reached $80 in response to the Bangor Punta exchange
offer, so that the Bangor Punta securities did not have an
$80 market value and could not honestly have been thought
to have such a value. We need not reach the question
whether prudent investors would have so construed the $80
B-13
April 28, 1970, Second Circuit Opinion
value or whether it would have been assumed, as was
apparently the case, that the value referred to was based
on such considerations as Bangor Punta’s earnings and
asset value as well as upon the sales price of the securities.
It is enough to point out that under either construction the
SEC had no way of checking the honesty of the figure, and
that the public did not receive the detailed information it
would have received from a prospectus issued after a
registration statement had been filed. Such information
would have eliminated the possibility, perhaps the proba-
bility, that some persons would have construed the $80
figure as referring to market value when that value was
neither accurate nor intended.?
Bangor Punta and Piper argue that even prior to the
filing of a registration statement an immediate disclosure
of market value is compelled in cases such as this both by
SEC vy. Texas Gulf Sulphur Co., 401 F.2d 833 (2 Cir. 1968),
cert. denied as to issues not pertinent here, sub nom. Coates
v. SEC, Kline v. SEC, 394 U.S. 976 (1969), and by the rules
of the New York Stock Exchange. We do not agree. The
only material fact in this case within the meaning of Texas
Gulf Sulphur was Bangor Punta’s commitment to offer its
securities for Piper Aircraft shares. Rule 135 provides
adequately for the announcement of a material fact such as
this; further disclosure would, as stated above, thwart other
policies of the securities laws. Had Bangor Punta observed
Rule 135 by revealing immediately its intention to make an
exchange offer and by later revealing the titles of the
securities it proposed to offer and the basis or ratio on
which the exchange was proposed to be made as soon as
'The prospectus which Bangor Punta later issued contained a
complete description of the securities it was offering for Piper stock,
including the over-the-counter sales price of those securities to which
such a price was applicable.
Raseesire g
B-14
April 28, 1970, Second Circuit Opinion
these matters were decided, adequate information concern.
ing the proposed transaction would have been placed before
the public and the potentially misleading estimate of value
would have been avoided.2, Even if we assume that knowl.
edge of the value figure involved here might conceivably
have conferred some benefit on insiders had it not been
revealed, we feel that this risk of unfair advantage is out-
weighed by the danger that substantial numbers of inves.
tors were misled by the figure’s publication. The fact that
a few additional sophisticated investors could have dis.
covered the $80 value guarantee in the description of the
transaction which Bangor Punta filed with the SEC pur.
suant to Section 13(d) of the 1934 Act is of no moment.
Such investors would almost certainly be small in number,
and any arguable danger of permitting them an unfair
advantage is outweighed by the stronger probability that
the press release misled a large number of unsophisticated
investors.
The same principles apply to the New York Stock Ex.
change’s requirement’ that insiders disclose information
likely to affect the market unless such information can be
restricted to a small group of top management officials.
In any event, a policy of the New York Stock Exchange,
although entitled to considerable respect, cannot bind the
Commission or the courts. Silver v. New York Stock Ex-
change, 373 U.S. 341, 357 (1963). To hold that disclosure
would be privileged here because the $80 value could not
be kept secret and might affect the market would mean
that many other companies could offer to sell securities
before their registration by claiming that the terms of the
proposed offer could not be kept totally secret and must
2 See, generally, SEC Release No. 33-5009 (Oct. 7, 1969).
3 New York Stock Exchange Co. Manual, Section A2.
B-15
April 28, 1970, Second Circuit Opinion
therefore be disclosed in full. Consequently we hold that
the May 8 press release by Bangor Punta violated Section
5(c) and therefore we remand the action to the district
court for it to consider in light of this opinion and with
the benefit of any further evidence which the parties may
present at trial what the most suitable remedy for the
violation might be.
Bangor Punta’s Purchases of Stock During
Its Exchange Offer
Rule 10b-6 forbids ‘‘any person ... (2) who is the
issuer or other person on whose behalf... a distribution
is being made . . . to bid for or purchase for any account
in which he has a beneficial interest, any security which is
the subject of such distribution ... or any right to purchase
any such security ....’’
On May 5, 1969, before the purchases of which Chris-
Craft complains, the SEC issued release No. 34-8595, an-
nouncing 2» proposed Rule 10b-13. This Rule, which did
not become effective until November 10, 1969, reads in part
as follows:
(a) No person who makes a cash tender offer or
exchange offer for any equity security shall, directly
or indirectly, purchase, or make any arrangement to
purchase, any such security (or any other security
which is immediately convertible into or exchangeable
for such security), otherwise than pursuant to such
tender offer or exchange offer, from the time such
tender offer or exchange offer is publicly announced
or otherwise made known by such person to holders of
the security to be acquired until the expiration of the
period, including any extensions thereof, during which
securities tendered pursuant to such tender offer or
B-16
April 28, 1970, Second Circuit Opinion
exchange offer may by the terms of such offer be
accepted or rejected; ....
The SEC announced in the same release that Rule 10b-13
served only to restate law which already existed:
This provision is, in effect, a codification of existing
interpretations under Rule 10b-6, which among other
things, prohibits the person making a distribution from
bidding for or purchasing the security being distributed
or any right to acquire that security. These inter.
pretations have pointed out that the security to be
acquired in the exchange offer is, in substance, either a
right to acquire the security being distributed or is
brought within the rule under paragraph b thereof; and
Rule 10b-6 prohibits the purchase of such security
during the distribution except through the exchange
offer, unless an exemption is available.
Despite the reference in the Release to ‘‘a codification of
existing interpretations under Rule 10b-6,’’ neither the SEC
nor the parties to this action have cited any such precedents,
nor have we found any. However, we do not find this lack
of precedent crucial if Rule 10b-6 should independently be
found to apply to purchases of stock while exchange offers
for such stock are outstanding.
One of the primary purposes of Rule 10b-6 is to prevent
an issuer of stock from manipulating the market for that
stock. As the court stated in SEC v. Scott Taylor € Co,
183 F. Supp. 904, 907 (SDNY 1959) :
Manipulation was often accomplished by those about to
sell securities or already engaged in selling securities
bidding on the market for the same securities, thereby
B-17
April 28, 1970, Second Circuit Opinion
creating an unjustifiable impression of market activity
which would facilitate the sale at artificially high prices.
This was one of the practices which the Securities
Exchange Act was designed to eradicate, and it is the
practice which is covered by Rule X-10b-6. (Footnote
omitted.)
See also, Weitzen v. Kearns, 271 F. Supp. 616, 623 (SDNY
1967), Willer v. Steinbach, 268 F. Supp. 255, 280 (SDNY
1967); SEC v. Electronics Security Corp., 217 F. Supp. 831,
836 (D. Minn. 1963).
Bangor Punta argues that its purchase of Piper stock
could only serve to drive up the price of Piper stock and
thus to make the Bangor Punta shares offered in exchange
appear less attractive—the opposite effect from that which
Rule 10b-6 would normally seek to prevent. However, this
argument overlooks the decided benefits that purchases of
target company stock ean produce for the initiator of an
exchange offer. If the price of the target company’s stock
does increase in response to cash purchases by the exchange
offer or after the offer has been announced, many share-
holders in the target company are likely to assume that the
price increase results solely from the bullish effect of the
exchange offer on the market. Small investors especially
would be likely to assume that the exchange offer was
receiving serious attention and approbation from larger,
more knowledgeable investors than they. The managements
of either the target company or the offeror can compound
this impression by announcing the number of shares of
target stock acquired by the offeror since the initiation of
the exchange offer. Absent some indication to the contrary,
the target company shareholders would be likely to assume
that the entire increase resulted from the offer, not from
cash purchases in addition to the offer.
| Bod
B-18
April 28, 1970, Second Circuit Opinion
Prevention of this kind of manipulation seems well with.
in the spirit of Rule 10b-6. It is within the letter of the
Rule as well. As quoted above, part (a) of Rule 10b-4
prohibits the issuer of a security not only from purchasing
the issued security itself while offering it, but also from
purchasing ‘‘any right to purchase any such security,”
Here the Piper shares carried the right to aequire Bangor
Punta securities as a result of Bangor Punta’s exchange
offer, Consequently, we hold that Bangor Punta could not
lawfully purchase these shares during the tenure of its
exchange offer.
It remains open to Bangor Punta to demonstrate at trial
that its purchases fall within the exemption provided by
Rule 10b-6 for ‘‘unsolicited . . . purchases . . . effected
neither on a securities exchange nor from or through a
broker or dealer ....’’ Moreover, we do not pass any
judgment at this time on the question of what remedy is
appropriate in regard to Bangor Punta’s unlawful pur-
chases of stock, nor on the significance of the fact. that
Chris-Craft itself purchased stock during an exchange offer
prior to the SEC’s warning.
We remand for further proceedings not inconsistent
with this opinion.
Moore, Circuit Judge (concurring in part):
I concur in the affirmance of the order denying a
preliminary injunction. Under customery procedure, the
issues framed by the pleadings would come on for trial.
Upon such facts as might be developed upon such a trial
and the conclusions of law found to be applicable thereto,
the case would come before us on appeal. In this case,
however, the majority, in effect, give their conclusions of
law before trial and appeal.
B-19
April 28, 1970, Second Circuit Opinion
Quite apart from giving the trial court an opportunity
to fulfill its role in arriving at a decision, the majority, in
their advisory opinion, misconstrue, I believe, the May 8th
press release and Rule 135,
There should be little doubt that if the May 8th agree-
ment had been misstated, a suit, alleging misrepresenta-
tion and fraud, would be before us. And yet any omission
of the all important terms proposed would have been
materially misleading. The exchange was to be for ‘‘Ban-
gor Punta securities and/or cash having a value, in the
written opinion of The First Boston Corporation, of $80
or more.’’ This was ‘‘the basis upon which the exchange
is proposed to be made,’’ Rule 135(¢)(4). The ‘‘offer to
sell’? exemption required this information. The most im-
portant element of ‘‘basis’’ was, of necessity, some indi-
cation as to value. $80 in cash needed no evaluation; the
package of securities, not then final, had to have some
equivalent measure. To say, as does the majority, that the
“announcements that the package of securities offered by
Bangor Punta would be valued at $80 oversteps the
exemption and, therefore, makes the press release an offer
to sell,’’ turn a preliminary and informative press release,
which advises the public of a forthcoming registration
statement, into a prospectus would—or at least should—
come as a shock to the S.E.C.
As to the stock purchases by Bangor Punta during its
exchange offer, the age-old question is again presented:
does a rule or statute merely codify an existing decision-
made rule of law or does it create a new rule? The very
fact that Rule 10b-6 was to be quite prospective in opera-
tion is rather convincing that the latter is the proper
conelusion.
In summary, I would affirm on the only issue before us,
the denial of a preliminary injunction, and would withhold
——-
ees
B-20
April 28, 1970, Second Circuit Opinion
any other opinions until we have an opportunity to pass
upon such future appeal as may come before us in this Case,
Anverson, Circuit Judge (coneurring) :
I concur in the aflirmance of the order of the District
Court, and in Judge Waterman's discussion of Rule 10b-,
I also coneur in the holding that on May 8 1969, the
appellees were neither required nor permitted to disclose
more than the fact of Bangor Punta‘’s commitment to make
an exchange offer of its seeurities to the Piper share.
holders as part of an agreement to purchase the holdings
of the Piper insiders, since the titles of Bangor Punta
securities and the basis or ratio of this exchange were not
yet established. For the reasons there expressed, the
policies of regulation common to the federal securities laws
require this resolution of the conflict between openness and
reticence in disclosing specitie details which is implicit in
the dictates of the Seeurities Exchange Act of 1934 and the
Securities Act of 1933.
I would not coneur, however, in any interpretation of
the opinion which might be thought to suggest that dis.
closure of information relating to the $80 valuation esti-
mate, specified in the insiders’ sale agreement, would not
be required under any circumstances beeause it would fail
to satisfy the 1934 Act's standard of materiality, regard-
less of whether supervening restrictions of the 1933 Act
are applicable. As Chief Judge Lumbard's dissent notes.
the additional fact that Bangor Punta had committed itself
to offer securities valued by a well-known investment
banking firm at not less than $80 per Piper share, and to
back this commitment with a conditional guarantee of the
value of the securities already offered to the Piper insiders,
might fall within the investor-oriented definition of materi-
B-21
April 28, 1970, Second Circuit Opinion
ality set out in relation to disclosure required by §10(b)
of the 1934 Act and Rule 10b-5 in SEC v. Texas Gulf Sul-
phur Co,, 401 F.2d 8383, 849 (2 Cir, 1968), cert. denied sub
nom. Coates v. SEC, 894 U.S. 976 (1969). The Court's
holding, in which I coneur, is simply that the possible appli-
eation of diselosure principles discussed in that case is
here *Soutweighed by the danger that substantial numbers
of investors were misled by the figure’s publication’ in a
manner violating Rule 135.
Were it necessary to consider the application of materi-
ality tests to the $80 value term, the facet could not be
overlooked that Rule 10b-5 applies to the disclosure of all
material ‘‘information,’’ 401 F.2d at 848, a category of
data which may include some ‘*matters which do not fall
tidily into either the ‘fact* or ‘opinion’ elass.’* A. Brom-
berg, Securities Laws: Frau Rule 10b-5, §7.4(6)
(d), p. I8¥ (1969). But this ease does not turn upon either
the validity of the distinetion between a material ‘*event"’
and a mere “prediction or opinion’ suggested in SEC
Release No. 5009 (Oct. 7, 1969), or upon its application to
these facts,
Lrusarp, Chief Judge (dissenting) :
I dissent.
Although I agree with the majority's conclusion that a
preliminary injunetion is not warranted in this case, I
cannot aecept the interpretation given by my colleagues
to those provisions of the securities laws invoked against
Bangor Punta. In my view Judge Tenney was substan-
tially correet in his rulings below, and his order should be
afiirmed.
This ease turns on two events, the issuance of the May 8
press release and Bangor Punta's purchases of 120,200
B-22
April 28, 1970, Second Circuit Opinion
shares of Piper stock from May 12 through May 24. |]
think that Bangor Punta acted properly in both situations.
Not only was the May 8 release proper, but the parties
could have done no less, for I read recent interpretations
of the securities laws as imposing an affirmative obligation
to disclose the matters announced in the release. As to
the purchases of the 120,200 shares, Bangor Punta did nor
then know of any rule or interpretation precluding the
transactions, and the Commission has at least twice passed
up opportunities to enforce its ‘*long-established”’ inter.
pretation of 10b-6 against Bangor Punta. Although it was
aware of the purchases when it was preparing its suit in
the District Court for the District of Columbia, the SEC
made no mention of them in the pleadings nor sought to
enjoin Bangor Punta from further purchase in the consent
decree. Later, the Commission approved Bangor Punta’s
registration statement without requiring any disclosure of
alleged violations of 10b-6. For the SEC now to take the
position that Rule 10b-6 prohibited the purchases repre-
sents a complete reversal of the position it had taken to-
wards Bangor Punta until now.
1. Section 5(c) cond Rule 135
It was entirely proper for Bangor Punta to enter into
the May Sth agreement with the Piper family, as the family
had every right to choose between takeover by Chris-
Craft, Bangor Punta, or any other group.
Bangor Punta agreed to use its best efforts to acquire
more than 50% of the Piper Common Stock. As ‘‘a part
of such best efforts,’’ it promised to ‘‘take all steps neces-
sary to make a further exchange offer to all holders of
Piper Stock . . .’*; each share was to be exchanged for
Bangor Punta securities or cash ‘‘having a value, in the
written opinion of the First Boston Corporation, of $80
B-23
April 28, 1970, Second Circuit Opinion
ormore....’’ There was a similar provision to safeguard
the Pipers in that they would received consideration worth
at least $80. Thus, as they well may have had a right to
expect, the other shareholders of Piper were assured sub-
stantially equal treatment to that received by the Piper
family. See Perlman v. Feldmann, 219 F.2d 173 (2d Cir.
1955); Andrews, The Stockholder’s Right to Equal Oppor-
tunity in the Sale of Shares, 78 Harv. L. Rev. 505 (1960).
Bangor Punta and Piper immediately notified the Stock
Exchange of this agreement and issued a press release on
May 8. I think Judge Tenney was correct in holding that
the press release was consonant with the exchange guide-
lines for announcing material corporation developments
and with the mandate of SEC v. Texas Gulf Sulphur, 401
F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969).
In Texas Gulf, we reiterated our view that the securities
laws should advance ‘‘the justifiable expectation of the
market place that all investors trading on impersonal ex-
changes have relatively equal access to material informa-
tion....’? 401 F.2d at 848. It seems clear that if this prin-
ciple is to be honored, the agreement with forty members of
the Piper family, in conjunction with the decision to launch
a tender offer, was material information requiring dis-
closure.
The majority intimates that the $80 figure was not a
material fact, a suggestion with which I cannot agree. The
test for materiality laid down in Texas Gulf is whether the
fact is one to which ‘‘[a] reasonable man would attach
importance . .. in determining his choice of actions in the
transaction in question.’’ 401 F.2d at 849. On May 8
Chris-Craft was offering $65 for each Piper share in a tax-
able exchange; no reasonable man holding Piper shares on
that date would find ‘‘unimportant’’ the fact that Bangor
;
Sa WG AIP —
B-24
April 28, 1970, Second Circuit Opinion
planned to offer, in the near future, a considerably more
attractive package of securities, with a value of approxi.
mately $80.
To me, however, finding the fact material does not jy
every case compel disclosure, for the need for equal access
to information does not automatically override competing
policies of the securities laws as embodied in other statn.
tory provisions and well-established regulations. Here.
Rule 135 advances the basic principle that the prosxpeectns
and registration statement shall be the primary source of
information during and before a contemplated offering, and
only limited kinds of information can be released prior to
filing.
The task of harmonizing regulations based on competing
policies should of course be left to the SEC in the firs
instance. But when, as here, the Commission refuses even
to recognize the existence of a conflict, we must strike the
balance. Fortunately, our task here is not difficult, for
there is language in Rule 135 which when read in the light
of Texas Gulf authorizes the announcement.
Most of the May 8th announcement—the fact of the of-
fering, the proposed date—was clearly authorized by Rule
135. While the $80 figure may seem more difficult to justify,
under the circumstances its announcement was the only
course open to Bangor Punta. Responding to the problem
of valuation, Rule 135(¢c)(4) provides for notification of
‘**the basis upon which the exchange is proposed to be made.
.,..’’ Although not free from doubt, in the light of Tezas
Gulf I would read this provision as permitting announee-
ment of the $80 figure.
The need for fair and equal access to information about
the terms of a tender offer must be balanced against prema-
ture and incomplete disclosure of a securities offering in
B-25
April 28, 1970, Second Circuit Opinion
contravention of the registration and disclosure require-
ments underlying the 1933 Act. The conflict is sharply
posed when, as here, the merger agreement sets only a
value for the exchange package, with the underlying securi-
ties left to be determined later. When the securities to be
offered are not specified at the time of the announcement,
the investing publie cannot even begin to make an inde-
pendent evaluation of the offer' and perforce may tend to
react significantly but blindly to the unsupported dollar
sum. Also, I realize there is a possibility for abuse, with
companies employing this manner of agreement in order to
gain the advantages of ‘‘ jumping the gun.”’
Despite these considerations, it seems to me that here
the need for diselosure was paramount. In addition to the
forty members of the Piper family and their agents, a large
group of persons employed by independent firms, including
accountants, eserow agents, banks, and printers, would of
necessity work on the Piper agreement and so learn of the
news. Not bound as insiders* or by the restraints of cor-
porate trust imposed on employees of Piper and Bangor
Punta, they would be free to trade upon this information,
and with Piper trading at a considerably lower price on
May 8, their response is easily foreseen. Even if under
some legal or moral duty of restraint, a group this large
could not be effectively policed or controlled. Further, the
figure would rapidly spread; a dollar sum speeds the rumor
' This situation must be distinguished from an agreement stipulat-
ing that the undetermined securities are to have a certain cash value.
This can occur when the tendering company promises to offer only
widely traded securities in its package; then, the market price of
widely traded securities as of the date the exchange becomes effective
determines the exchange ratio. There, the public is fully protected,
and I can see no arguments against full and immediate disclosure.
? The status of “insiders” as to all these people has not yet been
established and would raise difficult questions of enforcement.
tie eed
fe, ea tote
| 2
B-26
April 28, 1970, Second Circuit Opinion
as it is easily remembered and easily transmitted. Finally,
Piper stockholders, thus apprised by the May 8 release of
what they might receive if they held their shares rather
than tendering to Chris-Craft, clearly benefited from the
disclosure Chris-Craft can hardly complain that it was
placed at a disadvantage by reason of Bangor Punta’:
higher bid and its ability to pay more; thus the law of the
market place benefits the stockholders whose shares are
sought.
On petition for rehearing, another factor compelling
disclosure has been called to our attention. The so-called
‘‘tender offer’’ provision, section 13d-1 of the Securities Act
of 1934, required Bangor Punta to file a detailed description
of the May 8 agreement with the SEC within ten days, by
May 18th. When timely filed, the description in accordance
with section 13d-1 disclosed as an essential element of the
Agreement that Bangor Punta planned a registered offer
to the public shareholders of Piper, the offer to consist
‘‘of cash and/or securities having a value of at least
$80 per share. Such value to be determined by The
First Boston Corporation ....’’
This wording is virtually identical to the May 8 an-
nouncement.
The 13d-1 statement was placed in the public files of the
Commission, a repository over which, it is not unreason-
able to assume, the keener investment houses maintain a
close scrutiny. Thus, even if it be assumed that no ‘‘leaks”
of the sort described above would have occurred, sophisti-
cated investors within a few days would have obtained the
$80 figure merely by a careful perusal of public records.
The policies behind Texas Gulf command that such imper-
3 Indeed, if the price had not been announced, a Piper stockholder
who tendered his shares to Chris-Craft during the interim might well
have grounds for an action against Bangor Punta and Piper.
B-27
April 28, 1970, Second Circuit Opinion
fect dissemination be corrected by broad disclosure through
the public media, and Rule 135 must be read so as to permit
such a course of action.
It is one thing to recognize the competing considerations
and attempt to find a balanced solution and quite another
to state flatly, as does the SEC, that the companies are
under no duty to disclose. In its amicus brief, the Com-
mission argues that Piper and Bangor Punta had no duty
even to announce the fact of the agreement, let alone the
price, since neither they nor any of their insiders were
going to trade in the shares involved. I find this position
wholly unrealistic and hardly designed to protect the other
Piper stockholders. Simply put, Bangor Punta and Piper
realized they were faced with one of ‘‘those situations
which are essentially extraordinary in nature and which
are reasonably certain to have a substantial effect on the
market price of the security if [the extraordinary situation
is] disclosed.’’ SEC v. Texas Gulf Sulphur, 401 F.2d 833,
848. Disclosure was required.
Unlike the SEC, the New York Stock Exchange has tried
to chart a course which accommodates the competing con-
siderations. A Stock Exchange Rule adopted on July 18,
1968 in the wake of Texas Gulf in part provides:
Negotiations leading to acquisitions and mergers,
stock splits, the making of arrangements preparatory
to an exchange or tender offer ... are the type of
developments where the risk of untimely and inad-
vertent disclosure of corporate plans is most likely to
occur. ...
At some point it usually becomes necessary to in-
volve other persons to conduct preliminary studies or
assist in other preparations for contemplated trans-
actions... .. Experience has shown that maintaining
security at this point is virtually impossible. Accord-
B-28
April 28, 1970, Second Circuit Opinion
ingly, fairness requires that the Company make ap
immediate public announcement as soon as confide.
tial disclosures relating to such important matters are
made to ‘*outsiders.’’
The extent of the disclosures will depend upon the
state of discussion, studies, or negotiations. So far as
possible, public statements should be definite as to
price, ratio, timing and/or any other pertinent in.
formation necessary to permit a reasonable evaluation
of the matter. As a minimum, they should inelude
%°
those disclosures made to ‘‘outsiders’’....
NYSE Company Manual A-19 (July 18, 1969) (Addendum
at 19-20). This standard seems to me a realistic solution
to the problem.
I would hold that the May 8 announcement was proper,
reflecting a fair accommodation of Seetion 5(¢) and Rule
135 and the obligation to disclose material facts.
2. Rule 10b-6
Nor would I find that any violation of Rule 10b-6 was
oceasioned by Bangor Punta’s purchases of 120,200 shares
of Piper stock between May 14 and May 23. To reach these
transactions, the majority would stretch the wording of
10b-6 beyond anything that courts, commentators, and—in
published actions—the SEC had considered included until
this ease.
Rule 10b-6 seeks to prevent the manipulation of the price
of shares which are the subject of a current or impending
publie offering. It is coneededly a highly technical rule,
and, as the Commission explicitly noted at its adoption, it
covers only a limited number of undesirable practices:
The Rules [10b-6, -7, -8] do not purport to cover every
possible type of manipulation or deceptive activity.
B-29
April 28, 1970, Second Circuit Opinion
The fact that a particular activity is not specifically
dealt with or prohibited in such rules does not neces-
sarily mean that it is not unlawful under the Act or
the Commission’s other rules.
SEC Securities Act Release No. 5194 (July 5, 1955). The
practice particularly condemned is the offering company
purchasing its own shares on the market, thereby buoying
up the market price close to that set in the public offering.
As is so often the ease in the field of securities laws, there
are a host of other, closely related transactions having the
same manipulative effect on the tender offer which are also
barred by the Rula For example, section (b) controls the
situation where the offering in prospect involves warrants ;
there, the issuer cannot purchase those of its shares repre-
sented by the rights. It seems to me improper to extend
this sort of technical, limited and consistently interpreted
rule to a common practice which until now has never been
thought within its ambit.
As an original matter, it might be desirable to prohibit a
tendering company from purchasing the target company’s
shares, but the proper way to accomplish this end, taken
by the Commission with its new Rule 10b-13, is to adopt a
new rule rather than stretch an established one beyond its
recognized bounds. The Commission, however, seems not
to have been content to wait until 10b-13 became effective
to enforce its new policy. Rather, it invoked 10b-6 during
the interim by a boot-strap operation, claiming in the re-
lease announcing 10b-13 that the proposed rule was ‘‘in
effect, a codification of existing interpretations under Rule
10b-6....’’ I sympathize with the Commission’s dilemma
when, having announced a new policy, it cannot reach cur-
rent transactions until the new rule becomes effective. But
it seems to me that the cost of waiting will rarely be too
great as the Commission presumably has lived with the
:
Ds ae ¥ —
B-30
April 28, 1970, Second Circuit Opinion
offending practice for years; it expects us to make bad
law to bail it out.
My belief that 10b-6 is being invoked here merely as
a stop-gap measure is strengthened by several factors,
Although the Commission claims that its position refleets
consistent staff practice, I have found no published inter.
pretations, either administrative or judicial, before the
Release accompanying proposed Rule 10b-13 that indicate
the Commission’s view that 10b-6 reaches the shares of a
target company. And discussions of the phrase ‘‘rights to
purchase any such seecurity’’ and of section 10b-6(b) by the
commentators have been directed exclusively to the situa-
tions involving two securities of the same company, such
as the distribution of a convertible debenture coupled with
purchases of the underlying seeurity. See, e.g., Comment,
The SEC’s Rule 10b-6: Preserving a Competitive Market
During Distributions, 1967 Duke L.J. 809, 831; Disclosure
Requirements of Public Companies and Insiders 138-42
(Flom, Garfinkel & Freund ed. 1967).
Significantly, the SEC did not see fit to apply its inter-
pretation of 10b-6 to Bangor Punta, although it knew of
the May purehases.* The final paragraph of the consent
4It may well be that the Commission's course of action was
prompted by internal confusion. While Chris-Craft was warned
on April 7th that the Commission would consider purchase of Piper
stock while its tender offer was pending a violation of 10b-6, no such
warning was ever communicated to Bangor Punta. When Chris-
Craft abided by this prohibition, the Commission may have felt that
its error had given Bangor Punta an inequitable advantage which it
ought to seek to correct by the position it has taken in its amicus brief.
I do not feel, however, that Bangor Punta—an equally innocent party
—should be made to suffer for any failure on the part of the Com-
mission or its staff. In any event, Bangor Punta acted within the
law and consistent with the rulings of the SEC with respect to
Rule 10b-6.
-
B-31
April 28, 1970, Second Circuit Opinion
decree, entered on May 26, does not prohibit Bangor Punta
%
y
;
_ Ses
from acquiring Piper stock other than through the exchange
offer. Nor did the SEC require Bangor Punta to include an
appropriate disclosure in its prospectus, as it clearly had
the power to do,® of an alleged violation of its Rules, al-
though Bangor Punta did mention the May purchases.
Thus, I feel the SEC’s own conduct easts doubt on its claim
that ‘‘the Commission's staff has so construed the rule in
similar situations.’’
Rule 10b-6 has until this case been a limited, highly tech-
nical rule. Despite the fact that a change in Commission
policy cannot be put into effect for several months because
of the procedural safeguards of the Administrative Pro-
cedure Act, the Commission now claims that we must reach
the same result by accepting its interpretation, i.e., that
the rule has meant this all along. I cannot believe that
this practice is consonant with the standards of due process
and elemental fairness long engrained in the operation of
administrative law.
Since I conclude that Bangor Punta’s purchases do not
fall within the ambit of Rule 10b-6 as consistently inter-
preted and universally understood as of May, 1969, and
Ido not believe the May 8th announcement was in violation
of the securities laws, I would affirm Judge Tenney’s opin-
ion below.
5Sce, e.g. Northwest Industries Registration Effective, SEC
News Digest, Issue No. 69-73 (April 17, 1969).
ee
prserrers=
APPENDIX C
Opinion of Judge Milton Pollack of the United States
District Court of the Southern District of New York
in Securities and Exchange Commission v. Bangor
Punta Corporation, dated August 25, 1971
C-1
United States District Court
Soutuern District or New York
SecURITIES AND EXcHANGE CoMMISSION,
Plaintiff,
vs 70 Civ. 3940( MP)
Bancor Punta Corporation,
Defendant,
FINDINGS AND OPINION
APPEARANCES:
Puiuip A. Loomis, Jr., General Counsel
Davip Ferser, Solicitor
Rosert BE. Kusuner, Assistant General Counsel
James J. Sexton, Attorney
Attorneys for Plaintiff,
Securities and Exchange Commission
Washington, D, C. 20549
Wenster Suerrietp Fieiscumann Hitrcucock
& BrookrreLp
Attorneys for Defendant
One Rockefeller Plaza
New York, N. Y. 10020
By: James V. Ryan, Esq. and
C. Kenneth Shank, Jr., Esq. of Counsel
Pottack, District J udge.
Yat reese |
C-2
Judge Pollack’s August 25, 1971 Opinion
Pouiack, District Judge.
This is one of a series of eases in this Court arising out
of a contest between Bangor Punta Corporation (** Bangor
Punta’’) and Chris-Craft Corporation for control of Piper
Aireraft Company (** Piper**)—a struggle in whieh Bangor
Punta emerged, in September, 1969, with control of Piper,
Here the Seeurities and Exchange Commission (**Com-
mission”’) asks the Court to enjoin Bangor Punta from
violating the Securities Act of 1958 and the Securities Eyx-
change Act of 1934 and to order Bangor Punta to make an
offer of rescission to holders of Piper stock who exchanged
their shares for seeurities of Bangor Punta, pursuant to an
exchange offer of July, 1969.
The Commission charges that Bangor Punta’‘s registra-
tion statement and prospeetus dated July 18, 1969 pertain.
ing to the Piper exchange offer were materially deticient in
omitting to diselose an alleged deeision to sell Bangor
Punta’s 98.7°° stock interest in the Bangor and Aroostook
Railroad (* BAR") at a price far below its carrying value
on Bangor Punta’s books and financial statements: The
Commission further charges that Bangor Punta inteution-
ally deferred a closing of that sale in order to avoid making
and exposing the necessary write-downs until the exchange
offer was completed.
Bangor Punta denies that the sale had been deeided on
in the June to August period that year or that there was
‘In Chris-Craft Corporation v. Bangor Punta Corporation (6%
Civ. 2227) Chris-Craft sues for damages alleging that Bangor Punta’s
victory was due to violations of the securities laws. Piper and Bangor
Punta have cross-complained. (69 Civ. 2354 and 69 Civ. 2227
> As noted infra the sale of BAR stock took place October 2. 1%®
and was fer $5 million in cash, a figure some $13.5 million below
the carrying value of BAR on Bangor Punta’s financial statements.
C-3
Judge Pollack’s August 25, 1971 Opinion
then a reasonable probability of a sale. It contends that it
was not required to make any reference in the prospectus of
July 18, 1969 to the sale or to any steps leading to sale.*
The evidence adduced upon trial established the follow-
ing facts.
On or about May 29, 1969 Bangor Punta filed with the
Commission a registration statement and prospectus for an
offering of its securities to holders of Piper common stock
in exchange for their shares of Piper. The registration
statement beeame effective on July 18, 1969 and the pros-
pectus was sent thereafter to all Piper shareholders. On
this offering, Bangor Punta obtained 111,628 shares of Piper
Aireraft or about 7° of the 1,644,790 shares of Piper Air-
eraft common stock outstanding.
There is no information in the prospectus suggesting
consideration or pendeney of a sale in June, July or August,
1959. Bangor Punta did sell its stock in BAR to Amoskeag
Corporation (** Amoskeag*’) on October 2, 1969 at a price
of $5 million in eash plus certain contingent payments later
deseribed.
The historie cost of BAR‘s assets, less depreciation and
other accounting adjustments and less liabilities was about
29.8 million. However, the financial statements in’ the
prospectus earry Bangor Punta’s interest at $18.4 million,
a figure which retleets an appraised value of the BAR shares
as of September, 1965. The history of this figure is as
follows:
Tatil 1961, BAR was an independent company. It then
beeame a subsidiary of The Banger and Aroostook Corpo-
* Bangor Punta has alleged affirmatively that the administrative
staff of the Commission, te evercome its own errors and shortcem-
ings, has engaged in a course of conduct, the intended result of which
has been to interfere on behalf of and to favor Chris-Cratt Corpora-
ton in its struggle with Banger Punta fer control of Piper. a
struggle which has been geing on since May, 1909. No proof was
adduced to support this contention.
Ae RY ae
RP ARID FI
C-4
Judge Pollack’s August 25, 1971 Opinion
‘cation (the **Corporation’’) whieh had been formed as a
holding company. Duri>¢ 1960 and 1961 the Corporation
offered its seeurities te | \R shareholders in exchange for
their BAR shares and ..\juired more than 98° of BAR's
outstanding shares. Based on the market price of BAR
shares on the New York Stock Exchange before they were
delisted in 1961, the Corporation's interest was worth $8.1
million and the Corporation carried the BAR interest at
this figure in its financial statements.
In 1964, the Corporation combined with Bangor Punta
(a wholly-owned subsidiary of Punta Alegre Sugar Corpo-
ration). Although Bangor Punta could have shown its
equity in the net assets of the BAR at $29.8 million, it elected
to earry forward the figure appearing on the books of the
Corporation, viz., $8.1 million. It is elaimed that this was
done beeause of a strong possibility that BAR was to be dis-
posed of promptly. By September, 1965 that possibility
had evaporated. But, instead of restating the carrying
value of BAR at the amount of Bangor Punta’s equity inter-
est in BAR on a historieal cost basis (whieh would have
resulted in a carrying figure of $29.8 million) or at its or
its predecessor's cost, Bangor Punta obtained an appraisal
from investment banking houses with knowledge of the rail-
road industry. Based on their recommendation as to ap-
proximate fair market value Bangor Punta restated the
BAR holding at $18.4 million—approximately. $10 million
less than its equity in the underlying net asset value of the
railroad on an historical cost basis and $10 million more
than the former earrying figure. The difference between
the former carrying figure of $8.1 million and the new ap-
praised value of $18.4 million was eredited direetly te
Bangor Punta’s earned surplus, by-passing the profit and
loss account. This treatment had been the subjeet of inquiry
C-5
Judge Pollack’s August 25, 1971 Opinion
by the Commission in connection with a prior registration
statement and, after explanations were made, the Commis-
sion dropped the matter.
Except for minor accounting adjustments the $18.4
million carrying value of BAR established in 1965 remained
unchanged and was reflected in the 1969 registration.
Bangor Punta’s management had, for some time, sought
ameans of separating out BAR ina way which would permit
its continued operation as a railroad. Discussions to that
end were held within Banger Punta in 1967 and 1968 and
continued inte 1969. Several methods were speculated on:
viz. the ereation of a New England Railroad System by
eombining the BAR with the Maine Central and Boston and
Maine Railroads; an acquisition of the Delaware and Hud-
son Corporation to combine its railroad with the BAR; a
spin off of BAR or a rights offering to the Bangor Punta
stockholders. Prior to April of 1969 there seemed to be no
prospect of a buyer for the railroad.
On April 1, 1969 Banger Punta appointed a committee
to study the possible divestiture of BAR. The committee
consisted of Curtis M. Hutehins, a director and member of
the Exeeutive Committee, Gordon Robertson, eo-Chairman
of the Board and Chairman of the Exeeutive Committee,
Robert G. Stone and George H. Siel, Directors of the rail-
road. Messrs. Hutchins and Robertson were both past
presidents of the railroad. This was a highly knowledge-
able group on matters pertaining to the railroad and its
problems.
Some weeks after the Committee was appointed Amos-
keag Company through its president, Frederic C. Dumaine,
made an offer to C. M. Hutehins for the railread of $5
million in eash. Dumaine had long and aetive experience in
the railroad business as an operator. Amoskeag was a
|
COPAT UIE —
a rey
Sa FECA NES
C-6
Judge Pollack’s August 25, 1971 Opinion
registered investment company with investments in th,
Maine Central Railroad Company among other enterprises,
Dumaine’s price was merely the amount of the savings j)
operating expenses which he estimated could be etfected if
the Maine Central and BAR were combined.
Hutchins told Dumaine—in response to his query—that
Bangor Punta might dispose of its interest in the railroad
if the priee was right. To Dumaine’s offer of $5 million—
for either the assets or the stoeck*—Hutehins responded that
this was exceedingly low but that he would convey it to the
management. Essential details—ineluding the railread’s
‘ash flow figures; its balance sheet and a five year forecast,
both eash and profit and loss—were furnished to Dumnaine
at a second meeting with Hutchins. Dumaine reatlirmed his
$5 million offer as his highest priee. Hutehins explained
that he had no authority except to explore possibilities of
divestiture of the railroad; he had no power of decision.
Hutehins and the Committee members with whom he
conferred concluded that sale of BAR stock to Amoskeag at
the proferred price of $5 million was the ‘**best course for
Bangor Punta to pursue.”’
The company’s independent auditors were asked about
the accounting treatment which would be atforded a sale of
the railroad for $5 million. On May 20, 1969 they reported
that such a sale would be treated on the financial statements
of Bangor Punta as an extraordinary loss of about $15.
million.
On May 21, 1969 at a meeting of Bangor Punta’s Board
of Directors, Hutehins, speaking for all the members of his
Committee, stated that there were three possibilities for the
4Dumaine’s offer soon narrowed to one for the stock only and
remained such through the negotiations.
C-7
Judge Pollack’s August 25, 1971 Opinion
future of BAR. Bangor Punta might (1) keep the railroad
as is, (2) continue to seek to merge it with another railroad,
or (3) sell BAR at the best possible price. He discussed
each of these possibilities. In respect of the third possibi-
lity, he stated that the only person he knew who might be
interested in a purchase was Dumaine, of Amoskeag. He
reported that preliminary diseussions with Dumaine indi-
eated that he might be willing to pay $5 million in eash,
securities or some combination of both.
Hutchins told the Board that his Committee unanimously
recommended sale at the $5 million price. He reported that
over the next five vears a heavy infusion of eapital in the
order of $5 million would be needed to break even from
operations. He gave very little hope for the possibility of
a merger exeept conceivably with the Boston and Maine
Railroad, and noted that this would produce securities
rather than eash for Bangor Punta. This proposal of sale
Was a surprise to the Board and met with the objection that
the Board had insufficient information to make an intelligent
decision since a great deal of accounting, tax and legal work
had to be done as a preliminary matter to put the offer in
proper foeus.
In the course of the meeting, counter-suggestions as to
price to be sought were broached by the Chairman of the
Board, Nicholas M. Salgo.
’ —
Following discussion, it was the consensus of the Board
that Hutehins should attempt to negotiate for a sale, at
book value, of 51°C of the stoek of BAR and sale of the
balance at a higher price with a total consideratien to
approximate $7 million. Hutehins was separately author-
ized to negotiate a sale of 100° of the BAR stock, subject
to an investigation of the tax and aeecounting ramitieations
of such a transaction and subject to the approval of the
i
PART ey AR? — |
Bearers ad
C-8
Judge Pollack’s August 25, 1971 Opinion
Board of Directors or of the Exeeutive Committee of the
Board of Directors.
Dumaine, informed by Hutehins of the Board’s counter.
suggestions, would not change his offer. Dumaine and
Hlutehins then drafted an unsigned letter setting forth a
proposed arrangement of sale which Hutehins was to pre-
sent to the Board. The draft, reeiting that Hutehins was
authorized only to explore the situation tentatively and
that any ‘tunderstanding’* was subject to approval by the
Board of Directors’ stated that Hutehins and Dumaine
had agreed on the sale to Amoskeag of all the BAR stock
owned by Bangor Punta for $5 million plus some additions,
subjeet to LCC approval.
Shortly thereafter, on June 3, 1969, following Hutehins’
report toa key management group of Bangor Punta, it was
decided to table the entire matter until the tax impact upon
Bangor Punta of a sale of assets, as compared with some
other disposition of the interest, could be studied and
aseertained.S| Nothing indieated that there was any especial
urgeney to give the matter earlier consideration. While
the divestiture of this asset was a matter of significant
interest to Bangor Punta, time was not made of the essence,
by either Bangor Punta or Amoskeag.
Two weeks later, on June 16th, Hutehins met with
Dumaine and apprised him of the management’s decision
S$ Hutchins explicitly informed Dumaine that time was needed for
accountants and tax personnel of Bangor Punta to review the tar
effects of any deal and the evidence unquestionably confirms Hutchins
limited exploratory role.
The study would require considerable time since it involved
going to the Interstate Commerce Commission, sending representa-
tives to Maine and going back over some 70 years of tinancia!
history and records and books of the BAR—a time consuming and
complex project.
C-9
Judge Pollack’s August 25, 1971 Opinion
not to approve or aceept the unsigned draft letter. He
told him that Bangor Punta lawyers and accountants had
no time available then to make the investigations and re-
ports deemed essential by the Board; that they were busy
with a variety of other matters, including a pending SEC
registration statement (the Piper exchange offer) ; and that
it might be two months before they could get to the investi-
gation of the factors material to Bangor Punta’s econsidera-
tion of a sale,
Bangor Punta’s general exchange offer for the eommon
stock of Piper Aireratt expired at 5 P.M. on July 29, 1969
and was approved by Bangor Punta's shareholders on
August 7, 1969.) On August 8, 1969, Bangor Punta eom-
menced distributing its seeurities to Piper shareholders
who had accepted the exchange offer. The final prospectus
for the offer stated:
Until August 27, 1969, all dealers effecting transactions
in the registered securities, whether or not participat-
ing in this distribution, may be required to deliver a
Prospectus.
In the latter part of August, 1969, with the exchange
program well nigh completed, Hutehins approached the
general counsel of Bangor Punta with the suggestion that
the required studies in respect to a sale of BAR go forward.
Following instructions from the president, counsel began
to gather the information which the Board of Directors
Was seeking.’
Qn September 9, 1969, Bangor Punta's Board of
Directors continued their diseussions regarding the sale
of BAR, whieh ace ording to the minutes ‘thas been under
’The president was, however, careful to caution counsel not to
allow the inquiry to interfere with any pressing current matters.
——
“APRN
Bere
C-10
Judge Pollack’s August 25, 1971 Opinion
the consideration by the Board of Directors for a consider.
able period of time’’, Various proposals concerning the
sale of the railroad were discussed, including an assct sale,
a combination of a partial sale of the assets and a leasing
arrangement of the remaining assets, and the sale of the
stock of the railroad.
The Directors voted at that meeting to authorize Hut-
chins to consummate the sale of either the assets or stock
of BAR to Amoskeag or to any other buyer for a considera-
tion of $5 million or more in eash and such other additional
consideration and benefits as were in his judgment obtain-
able and the Board authorized the execution of documents
and the taking of all other action necessary to consummate
a sale in accordance with the terms and conditions so to
be negotiated.
Six days later, on September 15, Hutchins wrote to
Dumaine that Bangor Punta had not yet reached a decision
as to whether it would be most advantageous to dispose
of its interest in the BAR through a sale of the stock owner-
ship or in the form of an assets sale. Hutchins proposed to
Dumaine that an agreement be worked out which would
allow Bangor Punta, at its option, to sell either the BAR
stock or assets.
On October 2, Hutchins and Robertson met with Dumaine
in Boston. Dumaine refused to change his position in
respeet of an assets transaction, Thereupon, a contract
for the sale of the stock of BAR to Amoskeag was prepared
and signed and the closing followed immediately thereafter.
The agreement of sale called for payment of $5 million
in cash and other consideration. It was agreed that, if
within three years BAR should transfer all of its assets
exeept in a transaction in which neither gain nor loss is
recognized for federal income taxes, Amoskeag would pay
C-11
Judge Pollack’s August 25, 1971 Opinion
Bangor Punta an additional $1.5 million within 30 days
after such transfer sale or other disposition.. And, sub-
ject to specified conditions, Amoskeag agreed that it would
also pay the net profits received by BAR within the next
five years from sale of all or any part of its property at
Sears Island, Maine.
The public announcement of the BAR sale on October 3,
1969 expressly stated that it would result in a non-recurring
book loss of approximately $13 million with no tax benefit
tothe company and that part of the $5 million to be received
ineash for the stock would be subject to capital gains taxes.
Major Factual Contentions and Conclusions
It is contended by the Commission—and Dumaine gave
testimony supporting the notion—that, at some undefined
time during June, July or August, Bangor Punta had de-
cided upon the sale to Amoskeag but decided to defer it
to avoid disclosure in the pending registration statement
and prospectus. These contentions, as well as Dumaine’s
testimony on the subject, lack support both in the credible
evidence and in the probabilities. Indeed the evidence
which the Court accepts as worthy of belief unequivoeally
negates any such purpose or plan.
The Commission's reliance on Dumaine’s testimony is
misplaced and the inferenees which it has sought to draw
that a sale was determined upon and deliberately deferred
to avoid disclosure, are not accepted?
§The purpose of this provision is not entirely clear. It may have
been intended to act as a deterrent to Amoskeag to consider any
course hut continuance of operation of the road.
* From observation during the trial the Court concludes that both
Dumaine and Hutchins who negotiated and desired the sale, believed
what they wished to believe, that their personal agreement concluded
all but the formalities.
ee
| peel eee
C-12
Judge Pollack’s August 25, 1971 Opinion
The Bangor Punta Board’s behavior was consistent with
the dictates of prudence. It insisted on consideration and
study of alternatives. It accepted the sale only after being
convineed that no viable alternatives existed. If there was
a conscious tactical motive in delay, the most believable one
is that the Board hoped to let Dumaine (and indeed Hut-
chins, whose personal commitment to the sale was obvious)
simmer long enough to come up with something better,
Indeed, even after the Board meeting of September 9,
information was being supplied to the Board and, on Sep.
tember 29, some of the Board members attempted to block
a sale of stock and bring about a sale of assets. Their
reasons were weighty—for a sale of assets mighi permit
the reflection of a tax loss as high as $17.7 million, with
some #9 million of cash flow addition for Bangor Punta—
as distinguished for the taxability of proceeds from sale
of stock.
Thus, while the Court finds that there was an intention
to sell, failing other alternatives and upon the best available
tax and accounting bases, the Court does not find that
Bangor Punta consciously concealed, deferred or refrained
from going forward with Dumaine’s offer in order to cir-
cumvent disclosure in a pending registration statement:
Requirements of Disclosure
Bangor Punta could not in its registration statement
and prospectus for the exchange offer omit ‘‘to state [any]
material fact necessary in order to make the statements
made, in the light of the cireumstanees under which they
were made, not misleading.’’ Section 17(a) of the Securi-
ties Act of 1953, 15 U.S.C. 77q(a); Section 10(b) of the
Securities Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5,
17 CFR 240.10b-5.
Bangor Punta’s registration statement became effective
on July 18, 1969. It ‘‘spoke’’ as of that date. The duty of
C-13
Judge Pollack’s August 25, 1971 Opinion
dealers to use prospectuses continued until August 27,
1969.° The Commission insists that as of these dates
Bangor Punta intended to sell and there was a reasonable
probability that it would sell BAR at a substantial loss.
Its failure to reflect this state of affairs is claimed to
constitute the violations charged.
The Court has found that as of these dates Bangor
Punta had not reached a decision to sell. The Commis-
sion’s charge that the sale was a reasonable probability is
made from the vantage point of hindsight. In the total
perspective of events preceding the sale—including the
last-minute attempts to convert it into a sale of assets—the
Court cannot find that the sale was a reasonable probability
at the time and to the people involved. Cf. James Black-
stone Mem. Library Assn. v. Gulf, Mobile and Ohio R. Co.,
64 B2d 445 (7th Cir.), cert. denied, 361 U.S, 815 (1959).
However, this does not necessarily mean that Bangor Punta
met the obligation imposed upon it to make a requisite dis-
closure under the circumstances of this case. For the cir-
cumstances do indicate a sufficiently serious consideration
of the possibility of sale at a figure some $15 million below
the then carrying value of the BAR stock on Bangor
Punta’s books so as to force the conclusion that the Bangor
Punta directors could not, at the time, have believed that
the $18.4 million figure (based on an appraisal of 1969 fair
market value) any longer represented a responsible ap-
praisal of market value of the BAR holding.
10 The antifraud provisions of the Securities Act (§ 17(a)) and
of the Exchange Act ($10(b) and Rule 10b-5) require the pro-
specttis to reflect any post-effective changes necessary to keep the
prospectus from being misleading in any material respect. This is
sometimes handled mechanically by putting a sticker on the pro-
spectus or supplementing it otherwise. The procedure to be used is
set forth in 17 CFR 230.424(c).
ur coe |
PER
Wi gid ot coat aA AS
= me RRs he
C-14
Judge Pollack’s August 25, 1971 Opinion
In this respect, however, the Commission is claiming
more than it needs to. The essential question is whether,
despite the non-existence of intent or of reasonable prob.
ability, the circumstances surrounding the sale were such
as to indicate that the $18.4 million carrying figure of the
BAR holding was obsolete to the point of being misleading,
The Court finds that it was—absent full disclosure of the
factors affecting the ultimate decision to sell the BAR in.
terest at a figure of $5 million—or even $7 million—and
regardless of whether the sale was to be of stock or of
assets.
The Court is aware of no principle of accounting or of
fair disclosure which would justify a failure to up-date a
constructed carrying figure which may have reflected ap-
proximate fair value in 1965 but which was almost four
times the offer of a willing buyer (and the only willing
buyer) in 1969—an offer which the Board, despite its ef-
forts in good faith to find alternatives—was constrained
ultimately to accept. Consistency of fair disclosure re-
quired exposure of circumstances which so clearly rendered
obsolete an appraisal made four years earlier.
I find that Bangor Punta did not intentionally or pur-
posefully mislead Piper Aircraft stockholders or the public
or investors by the omission to make disclosure of the sale
under consideration nor did Bangor Punta or its directors
intend to gain an advantage over Chris-Craft by the non-
disclosure in the contest being waged for control of Piper.
There was no purposeful connection between the nondis-
closure and the contest for control. In other words, the
nondisclosure was not prompted by an improper purpose.
However, absence of bad faith does not excuse the failure to
state facts necessary to make the facts stated not mis-
leading.
The explanatory footnote which did appear on the 1969
balance sheet was given so that anybody looking at the
C-15
Judge Pollack’s August 25, 1971 Opinion
financial statements would not be confused as to why the
full equity of the railroad was not picked up by Bangor
Punta as the carrying value of its investment. By the same
token, the 1965 constructed carrying value should not have
been used when it was known to substantially exceed the
only bid that could be generated from a purchaser capable
and willing to buy and operate the asset.
Bearing on Exchanging Piper Holder
The standard of materiality to be applied here is
whether a reasonable stockholder of Piper might have hesi-
tated to make an exchange for Bangor Punta securities
with such a large loss figure emerging—at least until suf-
ficiently explained and put in proper perspective, in terms
understandable by a reasonable investor.
At the end of fiscal 1968, Bangor Punta had retained
earnings of $37.9 million. <A sale of the stock at $5 million
would result in a book loss equivalent to 36.5% of such
retained earnings.
At the end of fiscal 1968, the shareholders’ book equity
in Bangor Punta was $113.5 million and a sale of the BAR
at $5 million would result in a loss of 12% of the sharehold-
ers’ book equity.
Bangor Punta had reported profits for each of the five
years ending with that for September 30, 1968. A sale
such as was being investigated would involve the loss
($4.32 per share) which would have far exceeded the ecom-
pany’s net income for any of the five prior years.
The Court concludes that the registration statement
and prospectus of Bangor Punta relating to the Piper
exchange offer was misleading in its failure to disclose the
cireumstances surrounding the negotiations for sale of the
BAR interest. In so holding especial note is taken of the
f
f
ERY
AERIALS ESD STIR LID ASCE SLD SIO SES
&
.
=
3
-S
‘
C-16
Judge Pollack’s August 25, 1971 Opinion
unique ‘‘valuation’’ nature of the $18.4 million figure at
which the BAR interest was carried on Bangor Punta’s
books. The present conclusion is not necessarily to be
taken as applicable in cases where book carrying figures
are in accordance with principles of conventional trans.
actional accounting or where circumstances might other.
wise be different.
Relief to be Granted
The Commission has requested an order requiring
Bangor Punta to offer rescission to shareholders who
accepted the Bangor Punta exchange offer and an order
enjoining Bangor Punta from further violations of the
securities laws. The Court grants the first and denies the
second of these requests.
Bangor Punta claims that such an offer of rescission
would be an empty exercise since the Bangor Punta seeuri-
ties received by the Piper shareholders have a market
value far in excess of the Piper shares given up by them.
See Electronic Specialty Co. v. International Controls
Corp., 409 F.2d 937, 947 (2d Cir. 1969). The decision
whether to rescind is nonetheless one to be made by those
who took the exchange.
Accordingly, Bangor Punta will be required to make
an offer of rescission and the parties are direeted to submit
an appropriate decree for the Court’s consideration to
earry out such an offer. Such offer should allow Bangor
Punta full scope to point out any factual considerations
bearing on a decision to aceept or by-pass rescission as
may be accurate and appropriate under the cireumstances.
Bangor Punta claims that an injunction is unnecessary
and inappropriate since there is no evidence of its bad
faith; that it acted on advice of counsel and of its account-
fen aoe P — . 7 '
Des parker ow ~ SR CUR LS.
C-17
Judge Pollack’s August 25, 1971 Opinion
ants; and that this was an isolated transaction involving a
single unintentional violation. Securities and Exchange
Commission v. Torr, 87 F.2d 446 (2d Cir. 1937). Moreover,
Bangor Punta contends that its past conduct does not indi-
cate a reasonable likelihood of future violations. Securities
and Exchange Commission v. Franklin Atlas Corp., 171 F.
Supp. 711 (S.D.N.Y. 1959) (Dawson, J.); Securities and
Exchange Commission v. Texas Gulf Sulphur Co.,----___
soa (2d Cir. June 10, 1971).
The Commission insists that Bangor Punta has demon-
strated a propensity for violating the securities law because
the company allegedly violated a consent decree entered on
May 26, 1969 by the United States District Court for the
Distriet of Columbia in the Commission’s suit there against
Bangor Punta, by filing a registration statement which
omitted to disclose the facts discussed in this opinion.
That suit centered on a Bangor-Punta-Piper release of
May 8, 1969. Bangor Punta consented to the decree and
the Commission’s complaint here avers that the company’s
demonstrated propensity for violating the securities laws
is not at all based upon the issuance of that release (which
is a subject of controversy in an action by Chris-Craft
against Bangor Punta and others). Chris-Craft Industries,
Ine. v. Bangor Punta Corp., 426 F.2d 569, 573-576 (2d Cir.
1970) and ibid 69 Civ. 2354 now before this Court for
decision.
Under all the facts and cireumstances in this case, the
Commission has failed to carry its burden to establish,
with persuasive evidence, that Bangor Punta, its officers,
directors and employees have a propensity or natural
inclination to violate the securities law. Securities and
Exchange Commission v. Texas Gulf Sulphur Co., —_____
F.2d _.__ (2d Cir. June 10, 1971). Accordingly, the re-
quested injunction is denied.
eget Sawag
a
C-18
Judge Pollack’s August 25, 1971 Opinion
The foregoing shall constitute the findings and conclu.
sions required by F. R. Civ. P. 52(a).
Submit decree in accordance with these findings on 15
days notice.
So ORDERED.
Minton Po.uack
U.S. District Judge
August 25, 1971
APPENDIX D
Memorandum Opinion of Judge Milton Pollack
of the United States District Court of the South-
ern District of New York in Securities and Ex-
change Commission v. Bangor Punta Corpora-
tion, dated September 17, 1971
DEMS WANE ct Oa nell nani
D-1
Ruited States District Comut
SoutTHeERN District or New York
_—- )
Securities AND Excuance Comission,
Plaintiff,
v. -
70 Civ. 3940( MP)
Banxcor Punta Corporation,
Defendant.
A
MEMORANDUM
Pottack, District Judge.
Bangor Punta requested the Court to reopen the reeord
and to make additional findings of faet. Subsequent to re-
eeiving SEC's opposition to the request, Bangor Punta
withdrew the application to reopen the reeord as unneces-
sary and has substituted a request that the Court issue a
statement in disposing of this matter that generally ae-
cepted accounting principles were not litigated herein. The
request and opposing paper are being tiled herewith.
It is beyond the scope and intent of the opinion of August
25, 1971 to consider or decide what constitute accepted prin-
ciples of accounting in the abstract. The opinion deals solely
with the requirements of a prospectus used on an exchange
of securities and what is to be considered misleading in eon-
nection therewith. Any differences between accepted prin-
ciples of accounting and fair disclosure in a prospectus
must be resolved in favor of the disclosure requirements of
a prospectus which essentially are a management not an
accountant’s responsibility.
The application to reopen the record and for additional
findings is accordingly denied.
So OrpEREp.
(ORIGINAL SIGNED)
Minton Potuack
U.S. District Judge
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APPENDIX E
Memorandum of Settlement of Judgment of
Judge Milton Pollack of the United States
District Court of the Southern District of New
York in Securities and Exchange Commission
v. Bangor Punta Corporation, dated Novem-
ber 17, 1971
E-1
Anited States District Court
SoutrHerN District or New York
Securities AND ExxcHANGE
CoMMISSION,
Plaintiff,
v. - 70 CIV. 3940 (MP)
Bancor Punta Corporation,
Defendant.
MEMORANDUM ON SETTLEMENT OF JUDGMENT
Pottack, District Judge.
A provision has been inserted in the decree submitted
for settlement requiring that any rescinding holder should
account on the offer of rescission for any profits realized
from interim sale of all or any part of the original stock
obtained on the exchange in August, 1969.
The purpose of restitution is to put the injured party
in as good (not a superior) position as that oeeupied by
him before the contract or sale or exchange was made.
If a rescinding party has made profitable use of the subject
of the rescission, or has received fruits such as dividends
or interest or other benefits thereon, these profits, fruits,
other benefits and their values must be accounted for by
the rescinding party to effect a return to the status quo
ante. A party will not be permitted to retain the benefits
or fruits of a contract and at the same time repudiate it.
It is inappropriate for a rescinding party to in effect affirm
his ownership in part and to disaffirm the entire transaction.
It is a prerequisite to restitution that a party disgorge
to the other party any proceeds the former has received :
K-2
Memorandum of Settlement of Judgment
upon disposition of the original property. Marr y,
Tumulty, 256 N.Y. 15, 175 N.E. 356 (19381).
Mott v. Tri-Continental Financial Corp., 330 F.2d 468,
470 (2d Cir, 1964).
Ordinarily, if one no longer owns the original shares
acquired in a rescindable transaction, he is limited to an
action for damages and may not be accorded rescission,
Mott v. Tri-Continental Financial Corp., cit. supra, at 470,
Equity may waive this requirement in a proper case and
may permit the rescinding party to account to the other
party for the value of any part sold. Williston, Contracts,
§ 1463, p. 161 (8rd ed., Vol. 12, 1970). Equity may also
permit the restitution to consist of substitute shares
acquired for the purpose of rescission. In that event,
everything of value including the profit, if any, realized
from a prior sale or disposition of the original stock and
the subsequent reaequisition of like shares must be
accounted for to the other party as a prerequisite to
rescission, in the same way as other fruits of the interim
ownership must be restored. See, Corbin on Contracts
§§ 1114-1115, Volume 5 (1964 Ed.) ; 17 Am. Juris. 2d § 512,
p. 996 (2d Ed. 1964); Marr v. Tumulty, 256 N.Y. 15, 175
N.E. 356 (1981); Ufland & Co. v. McMahon, 215 App. Div.
267, 269 (4th Dept. 1926) ; Commissioner of Banks v. Chase
Securities Corp., 298 Mass. 285, N.E. 2d 472, 499, 500 (1937);
E.T.C. Corp. v. Title Guar. & Trust Co., 271 N.Y. 124,2
N.E. 2d 284 (1936).
November 17, 1971 Mitten Powack
U.S. District Judge.
APPENDIX F
Opinion of Judge Milton Pollack of the United States
District Court of the Southern District of New York
in Bangor Punta Corporation v. Chris-Craft Indus-
tries, Inc. et al., dated December 10, 1971
F-1
United States Bistrict Court
SovuTHeRN Disrrict or New York
Bancor Punta Corporation,
Plaintiff,
v.
> 69 CIV. 2354 (MP)
Curis-Crart Ixpustrigs, Inc.,
et al,
Defendant.
OPINION
APPEARANCES:
Wesster SHEFFIELD FLeiscuMann Hitcucock &
BrooKFIELD
Attorneys for Plaintiff
One Rockefeller Plaza
New York, N. Y. 10020
By: James V. Ryan,
William L. D. Barrett and
C. Kenneth Shank, Jr., Esqs. of Counsel.
Paci, Weiss, Rirxinp, Wuarton & Garrison
Attorneys for Defendants
345 Park Avenue
New York, N. Y. 10022
By: Arthur L. Liman,
Joseph J. Ackell and
Jack C. Auspitz, Esqs. of Counsel.
Pottack, District Judge.
iV. ;
<b 2OWR OO aga,
™ ea ;
F-2
Judge Pollack’s Opinion in Bangor Punta Action
Potiack, District Judge.
This cross action by Bangor Punta, a defendant in Chris.
Craft v. Bangor Punta et al (S.D.N.Y. 69 Civ. 2227) decided
this day, arises out of the bitter struggle between the two
companies for control of Piper Aircraft Corporation. That
struggle ended in the marketplace with Bangor Punta in
control and continues in the complaints and cross complaints
by the parties against each other arising out of their com-
petition.’
The principal facts are set out in this Court’s opinion
in S.D.N.Y. 69 Civ. 2227. They will be deemed incorpo-
rated and need not be repeated at length here.
Chris-Craft sued for damages as the losing contender
for control of Piper by reason of Bangor Punta’s alleged
wrongful acts. Bangor Punta countered by charging, in
essence, that because of the wrongful acts of Chris-Craft
it paid more than it would otherwise have paid to acquire
control of Piper. Both suits were tried together.
Bangor Punta adduced no proof specifically in its case
as plaintiff. It seeks support for its contentions in the ree.
ord developed in Chris-Craft v. Bangor Punta, et al.
(S.D.N.Y. 69 Civ. 2227).
This complaint, like that in the companion ease, is
replete with charges of breach of the requirements of
securities laws and rules. Like the other, it has been
brought and tried as though any such breach by a competi-
tor automatically creates windfalls for a sophisticated and
well-financed contender for corporate control. It must be
remembered that this is an action by the willing and win-
ning contender which bought Piper stock with its eyes oper,
presumably paying what it deemed control of Piper to be
1 Piper, the target company, asserted a counter claim agains
Chris-Craft in S.D.N.Y. 69 Civ. 2227.
F-3
Judge Pollack’s Opinion in Bangor Punta Action
worth. The Court has here been especially challenged to
maintain its footing in the realities and the equities in
searching (in vain) for credible evidence establishing eausal
ecnnections between alleged violations and actionable
damage.
The Contentions
(a) Bangor Punta insists that the plan of Chris-Craft to
acquire control of Piper existed before the time when, ac-
cording to Chris-Craft, the plan was formulated and that
Chris-Craft concealed its true purpose from a registration
statement filed with SEC to raise capital for the purchase
and from prospectuses legally required to be used during a
period when its unrevealed plan to obtain control of Piper
Was in existence.
We comment here on this contention because it is typical
of others in the case. Even if it rested on more than mere
surmise, it raises no issue proper to a plaintiff in Bangor
Punta’s posture. Bangor Punta was not a purchaser of
securities issued under the statement of which it complains.
There are possible links of relevance between the alleged
deficiency in the registration statement and Bangor Punta’s
campaign. But they are not links to liability of Chris-
Craft to Bangor Punta. Thus:
(1) If the registration statement were materially mis-
leading there might be room to argue that C hris-Craft ob-
tained by illegal means the money used to compete with
Bangor Punta. There might then be examined the rights
of those from whom the money was so obtained. But the
Court sees no basis for awarding damages to Bangor Punta
beeause Chris-Craft failed to disclose to its sources of funds
its intended use of those funds.
(2) If Chris-Craft did intend to use the proceeds of this
registered issue to obtain control of Piper, a disclosure of
F-4
Judge Pollack’s Opinion in Bangor Punta Action
that fact would have given Piper (and/or Bangor Punta)
an earlier opportunity than they had in fact to prepare a
counter-campaign. However, Chris-Craft owed no duty to
Piper or Bangor Punta to announce its intentions for their
benefit. Its disclosure obligations (assuming they existed
as alleged) in the prospectus complained of or in 13-D
reports, were for the benefit of investors with whom Chris.
Craft would be dealing in its campaign for control.'* Bangor
Punta does complain of failure to make—and of inadequate
—13-D statements. Thus:
(i) It asks us to find that Chris-Craft and the broker it
used to buy Piper stock constituted a ‘‘group”’ or *‘syndi-
cate’’ whose intentions should have been reported.
(ii) It contends that 13-D statements made by Chris.
Craft should have disclosed that (as alleged by Bangor
Punta) cash used in Chris-Craft’s tender offer was bor-
rowed and that such use of the cash would constitute a de.
fault under certain of Chris-Craft’s arrangements with its
creditors.
The first of these contentions is not only far-fetched, bu
is wholly out of Bangor Punta’s reach as a weapon against
Chris-Craft. The latter contention would be a dubious one
even if made by a Piper stockholder to whom the statement
is specifically addressed. For that stockholder either ten-
ders and walks off with cash or remains a Piper holder hav-
ing no concern with Chris-Craft’s relations with its eredi-
tors.”
1A See, GAF Corporation v. Milstein, 324 F.Supp. 1062 at 107
(S.D.N.Y. 1971) (Pollack, J.) “the Williams Bill concentrated on
an investor protection goal rather than on providing protection fo
management's ability to repel raiders.”
? The situation is not the same, of course, in a registration state
ment covering an offer of exchange. There the accepting holder
target company stock is destined to become an investor in the
offering company—with a strong interest in that company’s relations
with its creditors.
F-5
Judge Pollack’s Opinion in Bangor Punta Action
(b) Bangor Punta alleges that Chris-Craft opened a
secret’? ‘‘numbered’’ account at a brokerage firm which
assisted it in locating and acquiring large institutionally
held blocks of Piper. At least one institution (Technology
Fund) it is claimed, to which Chris-Craft paid $65 per
share for more than 100,000 shares of Piper—at a time
when the market was in the low fifties—simultaneously
made a large purchase of Chris-Craft stock in the open
market. The alleged purpose of this allegedly _pre-
arranged move was to ‘stabilize or manipulate’? the price
of Chris-Cratt common. Chris-Craft planned to inelude
in its acquisition program an offer of exchange of Chris-
Craft for Piper securities. Obviously, a high price for
Chris-Craft common would greatly facilitate such an
exchange.
(ec) Several other institutions (one of which had ten-
dered Piper stock to Chris-Craft for cash during the
pendeney of a Chris-Craft tender offer) also bought large
amounts of Chris-Craft on the open market. In the month
shortly before Chris-Craft filed its registration statement
to cover its proposed exchange offer, these institutions
purchased some 231,800 Chris-Craft shares (more than
17%) of the number outstanding. These purchases caused
the daily average of trading on the New York Stock Ex-
change to inerease from 7,500 shares to 25,400 shares. The
price of Chris-Craft common, during this month, rose to
4% above the average of its closing prices for the six
weeks preceding these purchases.
By mid-1970, with the serious market decline notably
in prices of stocks of conglomerates, the institutions were
taking heavy losses. Their liquidations of position, Bangor
Punta claims, were designed to do the least damage to the
price of Chris-Craft and hence to the progress of Chris-
Craft’s exchange offer program.
Berea
F-6
Judge Pollack’s Opinion in Bangor Punta Action
(d) While its cash tender offer for Piper stock was
open Chris-Craft was also buying Piper stock in the open
market. This was a violation of S.E.C.’s Rule 10b-6 and
the Commission, upon becoming aware of what was happen-
ing, ordered Chris-Craft to cease these purchases. There.
upon at least one institution (which had previously sold a
large block of Piper to Chris-Craft) purchased Piper stock
in the open market and tendered the shares to Chris-Craft.
Bangor Punta claims the transaction to be a device to have
done by others what Chris-Craft could not do itself.
Bangor Punta bottoms its case on Rule 10b-5 under the
Securities Exchange Act, claiming that Chris-Craft’s “in-
tegrated’’ bid for control of Piper was in its entirety a
‘‘manipulative and deceptive contrivance’’ whose total
effect was to inflate the price of Piper stock and so to dam-
age Bangor Punta as a purchaser of that stock. It cites
Eagle v. Horvath, 241 F. Supp. 341, 344 (S.D.N.Y. 1965) for
the proposition that while a thoroughly legal campaign
by Chris-Craft for control of Piper might also have raised
the price of Piper stock, it must make restitution for having
done the same thing by illegal means.’ It cites other cases
317 C.F.R. § 240.10b-5 (1971)
* Horvath and apposite cases, if at all applicable here, are in an
important sense contrary to Bangor Punta’s position. Bangor Punta
asks us to regard the entire Chris-Craft program as fatally tainted
because of alleged violation spots in the program. It does not beat
the burden of showing the causal relation between the violations
themselves and its damage. Yet, the holding in Horvath is precisely
that such a relation is a vital issue. In Horvath a motion for
summary judgment in a stockholders’ suit was denied because there”
was, at issue, the question whether an alleged false prospectus in
fact motivated stockholder _ votes on the plan being attacked in the case.
We did not, at Chris-Craft’s instance, spread the taint of single
alleged violations by Bangor Punta over all of Bangor Punta’s cam-
paign. We see no warrant for a contrary treatment of Bangor
Punta’s contentions here.
F-7
Judge Pollack’s Opinion in Bangor Punta Action
for the propositions that privity between buyer and seller
is not an essential condition for application of Rule 10b-5,
Fischman v. Raytheon, 188 F.2d 783, 786 (2d Cir. 1951)*° and
that manipulative activities unrelated to the plaintiff and
not designed to induce the plaintiff to buy or sell are, none-
theless, actionable. Cochran v. Channing Corp., 211 F.
Supp. 239 (S.D.N.Y. 1962) ;° Sarlie v. E. L. Bruce Co., 265
F. Supp. 371 (S.D.N.Y. 1967).7_ Characterizing itself as a
buyer of Piper ‘*deceived’’ by the manipulative activity of
Chris-Craft, Bangor Punta also invokes Crane Co. v. West-
inghouse Air Brake Co., 419 F.2d 787 (2d Cir. 1969)%, cert.
denied, 400 U.S. 822 (1970).
SIn Fischman, the court (Frank, C. J.) pointed out the difference
in proof required to sustain a Section 1] suit under the Act of 1933
and a Section 10-b suit under the Act of 1934. In the former the
plaintiff's burden is to show an acquisition of the direct subject of a
registration statement while in the latter, any deceived purchaser
relying on a fraud may sue.
®Cochran vy. Channing was a suit by a holder of Agricultural
Insurance Company stock who sold at depressed prices and alleged
that Channing Corporation, the defendant, dominated the Company,
formed an undisclosed plan to secure control of it by offering an
exchange of stock of another company for Agricultural and by pur-
chasing Agricultural stock at depressed prices caused by lowering
Agricultural’s dividend and other similar practices. Judge Dawson
of this District held the complaint good under Rule 10b-5 against a
motion to dismiss for lack of privity. The case cannot support the
contentions of a plaintiff in Bangor Punta’s posture. It cannot claim
useli a beneficiary of any fiduciary obligation of Chris-Craft such as
was deemed by Judge Dawson to be owed by Channing to the
plaintitf. ;
_ TSarlie v. Bruce seems wholly inapposite. It involved a default
dismissal of plaintiff's action and concerned itself largely with the
measure of damages in a counterclaim by a company (Bruce) whose
president (Gilbert) allegedly used misappropriated funds in an
attempt to capture control of Celotex Corporation.
® Crane Vv. Westinghouse, is beside the mark. There, the alleged
market manipulation was effected for the express purpose of preventing
RE a tee SOP Na
F-8
Judge Pollack’s Opinion in Bangor Punta Action
Other aspects of Chris-Craft’s program are complained
of—quite apart from their place in an overall scheme alleged
to be unlawful.
1. The allegedly induced purchases of Chris-Craft com.
mon by institutions preceding the Chris-Craft exchange
offer are alleged to be manipulations in violation of Section
9(a)(2) of the Exchange Act? which inflated the price of
Piper common, as well as that of Chris-Craft. Craune. supra,
is cited as authority for Chris-Craft’s liability.
2. Bangor Punta has reached into the Investment Com-
pany Act of 1940, 15 U.S.C. § 80a-1 ef seq., in its search for
deficiencies in Chris-Craft’s program and purports to have
found one in Section 17(a), 15 U.S.C. § 80a-17(a) (1971) of
that Act. The Section (together with relevant Section
2(a)(3), 15 U.S.C. § 80a-2(a)(3)) provides that without an
express order of S.E.C.
Sec. 17(a) It shall be unlawful for any affiliated per-
son or promotor of or principal underwriter for a
registered investment company (other than a company
of the character described in Section 12(d) (5) (A) and
a competitor for control from succeeding in its bid and the fact
pleaded showed a distinct causal nexus between the manipulatio:
and its actual and intended result. To suggest that Chris-Crait.
itself an avid buyer of Piper, “manipulated” the price of Piper upwar
and to characterize Bangor Punta as a buyer “deceived” by ths
manipulation strains even credulity.
9 Section 9(a)(2), 15 U.S.C. § 78i(a) (2) (1971), reads:
“It shall be unlawful for any person, . . . to effect, alone or wit!
one or more other persons, a series of transactions in any securit
registered on a national securities exchange creating actual ot
apparent active trading in such security or raising or depressing
the price of such security, for the purpose of inducing th
purchase or sale of such security by others.”
F-9
Judge Pollack’s Opinion in Bangor Punta Action
(B)), or any affiliated person of such a person, pro-
moter, or principal underwriter, acting as principal...
(2) knowingly to purchase from such registered
company, or from any company controlled by such
registered company, any security or other property
(except securities of which the seller is the issuer)...
Sec. 2(a)(3) ‘Affiliated person’? of another per-
son means (A) any person directly or indirectly own-
ing, controlling, or holding with power to vote 5 per
centum or more of the outstanding voting securities of
such other person; (B) any person 5 per centum or
more of whose outstanding voting securities are directly
or indirectly owned, controlled, or held with power to
vote, by such other person; ...
Since, at the time Chris-Craft made its purchase from
Technology Fund, supra, both it and the Fund owned more
than 5% of Piper, Chris-Craft was an affiliate of an
afiliate of an investment company and prohibited from
making the purchase without prior order of SEC. No such
order was ever requested.
The Merits of the Contentions
Chris-Craft’s response to Bangor Punta’s charges is to
label Bangor Punta’s ease as “sheer fantasy’’ and its
inferences as ** Kafkaesque logic’. Chris-Craft’s attacks
on the evidentiary underpinning and legal support of Ban-
gor Punta’s case would require a minute consideration of
the record and of precedents cited were this Court to
accord to Bangor Punta the status of damaged innocent
which it claims for itself,
But Bangor Punta cannot wear that mantle. It was the
willing and winning contestant in a hard fought and (for
both sides) enormously expensive struggle for control.
F-10
Judge Pollack’s Opinion in Bangor Punta Action
This Court will readily agree that Bangor Punta paid
more to acquire control of Piper than it would have if
Chris-Craft had not, by the time Bangor Punta entered
the contest, already been well on its way in acquiring Piper
stock. Indeed the possibilities are that, if Chris-Craft had
not already shown itself to be so powerful a bidder for
control, Bangor Punta’s cost would have been zero. For
the record is ineluctably convincing that Bangor Punta
came in at Piper’s urging and specifically to resist Chris.
Craft.
In dealing with Chris-Craft v. Bangor Punta et al., supra,
this Court made it clear that it would not, at the behest of
a disappointed contender in a battle for corporate control,
necessarily take the same view of the requirements of the
securities laws and rules as it does in cases of claimed
injury to the average public investor. These considerations
apply with even greater vigor to actions by the winner
complaining that he was forced to overpay.
Bangor Punta’s claim of ‘‘integrated’’ and ‘‘concerted”
efforts by ‘‘coparticipants’’ has no more weight than similar
language aimed by Chris-Craft, as plaintiff, against Bangor
Punta as defendant. Chris-Craft has amply disposed of
several of Bangor Punta’s factual contentions (as e.g,, its
charge that an originally submitted and then deleted portion
of Chris-Craft’s registration statement to cover its deben-
ture issue in December 1968 ‘‘evidenced’’ an undisclosed
intention to acquire Piper with the proceeds). But even
taking on their face each of Bangor Punta’s charges of
violations leaves us asking why Bangor Punta should be
made a money beneficiary. The price it paid for Piper
it paid with open eyes. The rapport between it and the
Piper management should have given it more easy access
to information about Piper than was available to Chris-
Craft—even with two Chris-Craft representatives on the
F-11
Judge Pollack’s Opinion in Bangor Punta Action
Piper board. Its inducement to pay the prices it did for
Piper control was not in any one or combination of the
violations it seeks to lay at Chris-Craft’s door step. The
inducement was its own determination to have control."
However, even if Bangor Punta were an apt plaintiff
to raise the shield of the securities laws and rules for its
protection, this Court would have great difficulty in find-
ing—on facts and law—that a convincing case has been
made out. Bangor Punta did not carry its burden of
persuasion on the issues presented in its case against Chris-
Craft. Its basie claim that Chris-Craft ‘*manipulated’’
upward the price of Piper stock asks us to assume that
Chris-Craft massaged the market against its ow interest—
since Chris-Craft was in an acquisition campaign—and
that Bangor Punta, amply aware of what Chris-Craft was
doing and bidding Chris-Craft up, was somehow victimized
by this massaging."" The claim is patently untenable. Its —
claim that purchases of Chris-Craft common by institutions
were arranged for manipulative or evasive reasons are
The disposition of this case and of Chris-Craft v. Bangor Punta
etal, S\D.N.Y. 69 Civ, 2227 eliminates any requirement for findings
as to damages. Were such findings necessary, this Court) could
give no weight to the unsubstantiated and cursory evidence presented
on behalf of Chris-Craft. On the other hand, the careful and well-
documented analysis presented by the expert for Bangor Punta was
persuasive in the main on the issue of fair market value of Piper
stock in or about May, 1969 during, but uninfluenced by, the contest
for control and fair market value uninfluenced by extraneous factors
at the time of the trial herein in March, 1971,
"The willingness of an innocent buyer to pay a manipulated
price does not deprive him of a right to complain of the manipulation.
But the essence of a manipulation is the execution of transactions
affecting prices or actual or apparent market activity for the purpose
of inducing others to buy or sell. While Chris-Craft's initial and
subsequent bids raised the prices of Piper stock these bids were for
the bona fide purpose of acquiring stock for itself, not to induce
others to buy the stock.
Qeesrernimeinecne
F-12
Judge Pollack’s Opinion in Bangor Punta Action
pure surmise—such basis as they do have is purely circun-
stantial and lacks the persuasive power needed to support
such charges. The charge that in disposing of Chris-Craft
holdings the institutions acted to produce the least possible
disturbance of price does no more than charge the institu.
tions with ordinary prudence in their management of their
affairs.
The charge of violation of Section 17(a) of the Invest.
ment Company Act, 15 U.S.C. § 80a-17(a) (1971) has some
surface plausibility but as little substance as the others,
That section can apply to the Chris-Craft-Technology Fund
transaction only upon a most abstrusely technical reading,
It is not clear whether the mechanics of transfer and
delivery and the ‘‘as of’’ dates for voting of Piper stock
at a forthcoming meeting were such as to truly vest in
Chris-Craft voting power for its 5% plus holding in Piper
at the time. Even if it did have that power, the record
before this Court is convincing that Chris-Craft, did not
then or thereafter, exercise any controlling influence in
Piper. Section 17(a) was designed to protect an invest:
ment company in its transactions with affiliates. In view
of the price received by the Technology Fund ($65 per
share as against the then market in the low fifties) and of
subsequent events, it is difficult to discern any harm to the
Fund in its sale of Piper stock to Chris-Craft. Bangor
Punta is, under the circumstances, well beyond the pale
of protection fairly intended by Section 17(a) of the Invest.
ment Company Act.
Bangor Punta’s charges, compiled by able and diligew’
counsel, are an illuminating catalogue of pitfalls in the pat!
of a contender for control of an unwilling target, competing
with a well-financed adversary. However, the diligence >
misplaced. The alleged breaches must not only be sup
ported by credible evidence but must, importantly, b
Span oN = _—
F-13
Judge Pollack’s Opinion in Bangor Punta Action
eausally linked to damages. The complaint falls short on
both scores.
The complaint is dismissed for failure to sustain with
eredible evidence, the burden of proof cast upon the
plaintiff.
The foregoing shall constitute the findings and con-
clusions required by F. R. Civ. P. 52(a).
So ORDERED.
(ORIGINAL SIGNED)
Mitton Po.tiack
December 10, 1971 U.S. District Judge
MILLE PMI LDN IL BORE AE ALF ATEN DIL LOLOL Lig IEE DIETER NOLS ONE RL EEN. EIS
APPENDIX G
Opinion of Judge Milton Pollack of the United States
District Court of the Southern District of New York
in Chris-Craft Industries, Inc. v. Piper Aircraft
Corporation, et al., dated December 10, 1971
G-1
United States Bistrict Court
SovuTHERN District or New YorkK
waa ;
(yris-Crart [xpustries, Ixc.,
Plaintiff,
v. *
+ 69 CIV. 2227 (MP)
Preer AirncraFTr Corporation, ef all.,
Defendants.
OPINION
APPEARANCES:
Paci, Weiss, Rirxkixnp, Wuartoxn & Garrison
Attorneys for Plaintiff
345 Park Avenue, New York, N.Y. 10022
By: Arthur L. Liman,
Joseph J. Ackell and
Jack C. Auspitz, Esqs., of Counsel
Wesster SHEFFIELD FLEISCHMANN HitcHcock
& BrooKFIELD
Attorneys for Defendants (Bangor Punta
Corporation, Nicholas Salgo and David
W. Wallace)
One Rockefeller Plaza, New York, N.Y. 10020
By: James V. Ryan,
William L. D. Barrett and
C. Kenneth Shank, Jr., Esqs., of Counsel
G-2
Judge Pollack’s Opinion in Chris-Craft Action
CuapBourRNE, Parke, WuitesipeE & WoLrFr
Attorneys for Defendants (Piper Aircraft
Corporation, William T. Piper, Jr., Howard Piper
and Thomas F. Piper)
25 Broadway, New York, N.Y. 10004
By: Paul G. Pennoyer, Jr.,
Zachary Shimer and
Irene C. Warshauer, Esqs., of Counsel
SULLIVAN AND CROMWELL
Attorneys for Defendants (The First Boston
Corporation, Paul L. Miller and Nicholas A, Bayard)
48 Wall Street, New York, N.Y. 10005
By: John F. Arning,
Roger L. Waldman and
Charles W. Sullivan, Esqs., of Counsel
Potuack, District Judge:
The Context of the Case
This case and its companion cases! arise out of the ur-
successful attempt of Chris-Craft Industries, Inc. (Chris
Craft), a diversified manufacturer of recreational products,
to secure control of Piper Aircraft Corporation (Piper), a
leading manufacturer of light aireraft. The Chris-Craft
takeover attempt was resisted by Piper and by a competi-
tor for the control, Bangor Punta Corporation (Bangor
Punta), which eventually succeeded in acquiring more than
50% of the outstanding Piper shares. The bulk of Chris
1 Bangor Punta v. Chris-Craft, U.S.D.C. S.D.N.Y., 69 Civ. 2354
(MP), which is being decided this day; and SEC v. Bangor Punta,
et al., 331 F. Supp. 1154 (S.D.N.-Y. 1971) (Pollack, J.).
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Judge Pollack’s Opinion in Chris-Craft Action
Craft’s complaints is based on charges that Bangor Punta’s
success Was achieved and Chris-Craft’s failure and its as-
serted damages were caused by deception of the Piper
shareholders and of Chris-Craft in violation of various pro-
visions of the federal securities laws and regulations.
Only a minor segment of the case involves charges that
Chris-Craft was directly deceived by Piper. The balance of
the case deals with charges of deceptions alleged to have
been committed by Piper and Bangor Punta on public
holders of Piper stock to induce them not to accept Chris-
Craft’s offers to aequire their stock by purchase or ex-
change. Chris-Craft claims also that Bangor Punta pri-
vately acquired three critical blocks of Piper stock during
the pendency of an exchange offer in violation of an SEC
Rule.
The contest for control of Piper was sophisticated and
hard fought. The contenders were men accustomed to the
handling of vast sums of publie capital, were assisted by
skilled professionals and were themselves seasoned in cor-
porate tactics. It is not hard to detect personal overtones
which added some passion and urgency to the contest. In
addition, the conduct of both sides invoked the attention of
the SEC and the New York Stock Exchange.
Thus, neither side can approximate itself to the position
of an average public investor for whose express benefit, in
dealing with others of superior knowledge (or the capacity
to gain it), skill and resources, the law was designed. The
Court does not intend to imply that contests for corporate
control are to be unmediated by standards properly appli-
cable under common law, federal legislation or regulation.
However, substantial justice cannot be done by mere me-
chanical application of standards evolved to correct the
imbalances of knowledge, skill and capacity for self-
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Judge Pollack’s Opinion in Chris-Craft Action
protection which so often oceur in securities transactions
between members of the public and professionals. Nor can
the Court be indifferent to the ultimate source from whieh
the damages are claimed, in effect. (See infra, 35-37).
The Major Events
Piper stock was listed on the New York Stock Exchange,
There were 1,641,890 shares outstanding. Chris-Craft began
purchasing Piper stock just before the end of 1963. By
January 21, 1969 Chris-Craft had acquired 102,600 shares
of Piper stock on the New York Stock Exchange. On the
next day it increased its holdings by purchasing 101,100
shares at $65 per share from Technology Fund, a midwest.
based mutual fund; this made Chris-Craft’s holdings total
13% of the issue. The market for the stock was then in
the low fifties. On January 23, 1969, Chris-Craft announced
a cash tender offer for Piper shares of $65 per share and
it obtained 304,606 shares through tenders. It also bought
an additional 38,000 shares approximately bringing its
holdings by February 3, 1969, to 547,106 shares, a number
barely short of one-third of the shares outstanding, at a
cost of $34,677,000.
The Piper management (in essence the Piper family),
which held some 31% of the outstanding Piper stock, reacted
to the Chris-Craft tender offer by a communication te
shareholders late in January to dissuade them from accept:
ing the Chris-Craft tender offer. One of its statements
eomplained of by Chris-Craft was that the Piper manage-
ment considered the Chris-Craft $65 tender price inade-
quate. Chris-Craft charges that this was a misleading
statement, based on the facts that Piper’s investment
bankers, First Boston Corporation, had advised Piper that
a $65 price was fair and, furthermore, that on January 2,
Piper had announced an agreement to sell 800,000 unissued
Piper shares to Grumman Aircraft Company at $69 per
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Judge Pollack’s Opinion in Chris-Craft Action
share? The Grumman agreement was not consummated
and the additional shares were not issued.
On February 27, Chris-Craft filed with the Securities
and Exchange Commission (‘*Commission’’) an S-1 regis-
tration statement as a step in a proposed offer of exchange
of a Chris-Craft package of securities for Piper stock.
(The statement did not become effective until May 15.)
On Mareh 22, Piper issued 469,199 authorized but un-
issued shares to aequire control of two companies, viz.,
Southply, Incorporated and United States Conerete Pipe
Company of Florida. Apart from increasing the number of
shares outstanding, these acquisitions could make Piper
less attractive to Chris-Cratt since the Pipe Company was
not in the recreational field and ownership of Southply, a
speedboat manufacturer, might bring Chris-Craft into con-
flict with antitrust law. However, Piper rescinded both of
these acquisitions within a short time. Piper had failed to
comply with its listing agreement with the New York Stock
Exchange by issuing such a block of shares before seeking
the approval thereof of its stockholders. This omission led
the Exchange to refuse the listing of the newly issued
shares, to suspend trading in all Piper shares on the Ex-
change and to initiate delisting proceedings.
Following the rescission of both of these acquisitions,
the Piper family revived negotiations with Bangor Punta,
begun early in January, toward securing a defensive merger
between Piper and Bangor Punta.
_—_
*Part of the agreement, not mentioned in the announcement,
Was an option in Grumman to “put” the shares back to Piper after
Sx months at Grumman's cost plus interest. Piper insists that the
“put” was part of an overall understanding that the proposed sale
Was a step in a possible Grumman-Piper merger, failing which
Grumman might not be interested in a holding of Piper stock.
The “put” was described in Piper's application to list the addi-
tonal shares on the New York Stock Exchange.
eee a
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Judge Pollack’s Opinion in Chris-Craft Action
The discussions were fruitful. The Piper family agreed
to exchange its 501,090 shares for a package of Bangor
Punta securities and Bangor Punta agreed to use its best
efforts to acquire a majority of the outstanding Piper
shares. Pursuant thereto, on May 8, 1969, Bangor Punta
and Piper issued a release which made the usual joyful
announcement of a fitting marriage, stating that the Piper
family would receive Bangor Punta securities for their
Piper shares and containing the following potent message:
Bangor Punta has agreed to file a registration state.
ment with the SEC covering a proposed exchange offer
for any and all of the remaining outstanding shares
of Piper Aireratt for a package of Bangor Punta
Securities to be valued in the judgment of The Firs
Boston Corporation at not less than $80 per Piper
share.
Chris-Craft has attacked this release and has attacked
also the registration statement referred to in the release.
We deal later with those issues.
Bangor Punta entered the battle with several consider-
able advantages. It was sponsored by the management of
Piper, it could look forward to the Piper family block* and.
significantly, it alluded to a value figure of $80, exceeding
Shortly after this release was issued, the Commission, deeming
the release to be a gun-jumping offer by Bangor Punta, sought ©
the U.S. District Court for the District of Columbia an injunctie:
to prohibit further similar releases before effectiveness of the Banger
Punta registration statement. Bangor Punta and Piper, withou
admitting any of the allegations, consented to the issuance of 2
injunction,
4 One of the issues raised by Chris-Craft respecting Bangor Punta:
acquisition of the Piper block relates to a gu
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